0001104659-22-104035.txt : 20220929 0001104659-22-104035.hdr.sgml : 20220929 20220929115920 ACCESSION NUMBER: 0001104659-22-104035 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20220731 FILED AS OF DATE: 20220929 DATE AS OF CHANGE: 20220929 EFFECTIVENESS DATE: 20220929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD SPECIALIZED FUNDS CENTRAL INDEX KEY: 0000734383 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03916 FILM NUMBER: 221278930 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106691000 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD SPECIALIZED FUNDS/ DATE OF NAME CHANGE: 20011121 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD SPECIALIZED PORTFOLIOS INC DATE OF NAME CHANGE: 19920703 0000734383 S000002920 Vanguard Dividend Growth Fund C000008004 Investor Shares VDIGX 0000734383 S000002921 Vanguard Energy Fund C000008005 Investor Shares VGENX C000008006 Admiral Shares VGELX 0000734383 S000002922 Vanguard Health Care Fund C000008007 Investor Shares VGHCX C000008008 Admiral Shares VGHAX 0000734383 S000002923 Vanguard Global Capital Cycles Fund C000008009 Investor Shares VGPMX 0000734383 S000002924 Vanguard Real Estate Index Fund C000008010 Investor Shares VGSIX C000008011 Admiral Shares VGSLX C000008012 Institutional Shares VGSNX C000032424 ETF Shares VNQ 0000734383 S000011322 Vanguard Dividend Appreciation Index Fund C000031349 Investor Shares VDAIX C000031350 ETF Shares VIG C000135474 Admiral Shares VDADX 0000734383 S000065529 Vanguard Global ESG Select Stock Fund C000211921 Admiral Shares VESGX C000211922 Investor Shares VEIGX N-CSRS 1 tm2224981d2_ncsrs.htm N-CSRS

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT

OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number: 811-03916

 

Name of Registrant: Vanguard Specialized Funds
Address of Registrant: P.O. Box 2600
  Valley Forge, PA 19482

 

Name and address of agent for service: Anne E. Robinson, Esquire
  P.O. Box 876
  Valley Forge, PA 19482

 

Registrant’s telephone number, including area code: (610) 669-1000

 

Date of fiscal year end: January 31

 

Date of reporting period: February 1, 2022—July 31, 2022

 

 

 

 

 

Item 1: Reports to Shareholders

 

 

 

Semiannual Report   |   July 31, 2022
Vanguard Energy Fund

 

Contents
About Your Fund’s Expenses

1
Financial Statements

4
Trustees Approve Advisory Arrangement

16
Liquidity Risk Management

18

 

About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

 

Six Months Ended July 31, 2022      
  Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Energy Fund      
Investor Shares $1,000.00 $1,071.60 $2.21
Admiral™ Shares 1,000.00 1,072.20 1.80
Based on Hypothetical 5% Yearly Return      
Energy Fund      
Investor Shares $1,000.00 $1,022.66 $2.16
Admiral Shares 1,000.00 1,023.06 1.76
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.43% for Investor Shares and 0.35% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

 

Energy Fund
Fund Allocation
As of July 31, 2022
United States 52.0%
United Kingdom 16.9
France 8.9
Canada 8.4
Norway 3.5
Italy 2.9
Spain 2.2
India 1.8
Brazil 1.3
Germany 1.3
Other 0.8
The table reflects the fund’s investments, except for short-term investments.
3

 

Energy Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (99.4%)
Brazil (1.3%)
  Petroleo Brasileiro SA 10,799,725    77,145
Canada (8.3%)
  Cenovus Energy Inc.  9,576,426   182,718
  Enbridge Inc.  3,608,632   162,065
  TC Energy Corp. (XTSE)  1,139,407    60,753
  Pembina Pipeline Corp.    755,676    28,851
  ARC Resources Ltd.  1,746,479    24,495
  TC Energy Corp.    429,158    22,880
        481,762
China (0.8%)
  China Yangtze Power Co. Ltd. Class A 13,326,260    47,285
France (8.8%)
  TotalEnergies SE  4,030,974   205,891
  Engie SA (XPAR) 12,989,424   160,710
  TotalEnergies SE ADR  2,779,005   141,896
        508,497
Germany (1.3%)
  RWE AG  1,851,889    76,183
India (1.8%)
  Power Grid Corp. of India Ltd. 37,452,361   101,423
Italy (2.9%)
  Tenaris SA  6,268,325    87,719
  Enel SpA 15,877,888    80,045
        167,764
Norway (3.5%)
  Equinor ASA  5,179,330   199,425
Russia (0.0%)
1 LUKOIL PJSC ADR  1,423,477        —
Spain (2.2%)
  Iberdrola SA (XMAD) 11,774,858   125,738
  Iberdrola SA    333,012     3,550
        129,288
United Kingdom (16.8%)
  Shell plc (XLON) 11,748,054   313,395
  BP plc 45,505,929   222,718
  Shell plc ADR  3,887,765   207,529
  National Grid plc  8,744,490   120,408
  BP plc ADR  3,551,189   104,334
        968,384
    Shares Market
Value

($000)
United States (51.7%)
  ConocoPhillips  3,742,854   364,666
  Marathon Petroleum Corp.  3,681,698   337,465
  Pioneer Natural Resources Co.  1,071,829   253,970
  Coterra Energy Inc.  6,871,971   210,214
  Duke Energy Corp.  1,762,463   193,748
  Chesapeake Energy Corp.  1,929,822   181,731
  Exelon Corp.  3,791,621   176,273
  NextEra Energy Inc.  2,015,543   170,293
  Southern Co.  2,100,611   161,516
  FirstEnergy Corp.  3,355,355   137,905
  Sempra Energy (XNYS)    804,333   133,358
  American Electric Power Co. Inc.  1,322,108   130,307
  Edison International  1,757,330   119,094
  Williams Cos. Inc.  3,172,492   108,150
  Constellation Energy Corp.  1,263,874    83,542
  CenterPoint Energy Inc.  2,543,728    80,611
  Avangrid Inc.  1,113,581    54,265
  Schlumberger NV  1,377,191    50,997
* First Solar Inc.    356,359    35,340
      2,983,445
Total Common Stocks (Cost $4,283,887) 5,740,601
Temporary Cash Investments (0.6%)
Money Market Fund (0.0%)
2 Vanguard Market Liquidity Fund 1.903%       1,042       104
4

 

Energy Fund
    Face
Amount
($000)
Market
Value

($000)
Repurchase Agreement (0.6%)
  NatWest Markets plc, 2.230%, 8/1/22
(Dated 7/29/22, Repurchase Value $35,607,000, collateralized by U.S. Treasury Note/Bond 1.875%–2.250%, 12/31/24–7/31/26, with a value of $36,312,000) 
    35,600    35,600
Total Temporary Cash Investments (Cost $35,704) 35,704
Total Investments (100.0%) (Cost $4,319,591) 5,776,305
Other Assets and Liabilities—Net (0.0%) (1,155)
Net Assets (100%) 5,775,150
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 Security value determined using significant unobservable inputs.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
  ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
5

 

Energy Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers (Cost $4,319,487) 5,776,201
Affiliated Issuers (Cost $104) 104
Total Investments in Securities 5,776,305
Investment in Vanguard 212
Foreign Currency, at Value (Cost $193) 189
Receivables for Accrued Income 6,596
Receivables for Capital Shares Issued 5,760
Total Assets 5,789,062
Liabilities  
Due to Custodian 457
Payables to Investment Advisor 2,841
Payables for Capital Shares Redeemed 5,993
Payables to Vanguard 445
Deferred Foreign Capital Gains Taxes 4,176
Total Liabilities 13,912
Net Assets 5,775,150
At July 31, 2022, net assets consisted of:  
   
Paid-in Capital 4,775,081
Total Distributable Earnings (Loss) 1,000,069
Net Assets 5,775,150
 
Investor Shares—Net Assets  
Applicable to 41,837,020 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
1,863,983
Net Asset Value Per Share—Investor Shares $44.55
 
Admiral Shares—Net Assets  
Applicable to 46,778,988 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
3,911,167
Net Asset Value Per Share—Admiral Shares $83.61
  
See accompanying Notes, which are an integral part of the Financial Statements.
6

 

Energy Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends1 141,377
Interest2 175
Securities Lending—Net 66
Total Income 141,618
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 4,364
Performance Adjustment 1,100
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 2,105
Management and Administrative—Admiral Shares 2,934
Marketing and Distribution—Investor Shares 65
Marketing and Distribution—Admiral Shares 77
Custodian Fees 61
Shareholders’ Reports—Investor Shares 33
Shareholders’ Reports—Admiral Shares 17
Trustees’ Fees and Expenses 1
Other Expenses 14
Total Expenses 10,771
Net Investment Income 130,847
Realized Net Gain (Loss)  
Investment Securities Sold2,3 111,613
Foreign Currencies (1,538)
Realized Net Gain (Loss) 110,075
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2,4 131,520
Foreign Currencies (154)
Change in Unrealized Appreciation (Depreciation) 131,366
Net Increase (Decrease) in Net Assets Resulting from Operations 372,288
1 Dividends are net of foreign withholding taxes of $7,272,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $18,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
3 Realized gain (loss) is net of foreign capital gain taxes of $23,000.
4 The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($44,000).
  
See accompanying Notes, which are an integral part of the Financial Statements.
7

 

Energy Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 130,847   177,015
Realized Net Gain (Loss) 110,075   116,270
Change in Unrealized Appreciation (Depreciation) 131,366   1,155,587
Net Increase (Decrease) in Net Assets Resulting from Operations 372,288   1,448,872
Distributions      
Investor Shares (3,003)   (57,404)
Admiral Shares (6,813)   (119,222)
Total Distributions (9,816)   (176,626)
Capital Share Transactions      
Investor Shares (24,978)   (14,569)
Admiral Shares 58,604   7,935
Net Increase (Decrease) from Capital Share Transactions 33,626   (6,634)
Total Increase (Decrease) 396,098   1,265,612
Net Assets      
Beginning of Period 5,379,052   4,113,440
End of Period 5,775,150   5,379,052
  
See accompanying Notes, which are an integral part of the Financial Statements.
8

 

Energy Fund
Financial Highlights
Investor Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $41.64 $31.66 $43.28 $47.85 $55.62 $52.70
Investment Operations            
Net Investment Income1 .978 1.364 1.449 1.519 1.300 1.4772
Net Realized and Unrealized Gain (Loss) on Investments 2.001 10.019 (11.669) (4.524) (7.788) 3.035
Total from Investment Operations 2.979 11.383 (10.220) (3.005) (6.488) 4.512
Distributions            
Dividends from Net Investment Income (.069) (1.403) (1.400) (1.565) (1.282) (1.592)
Distributions from Realized Capital Gains
Total Distributions (.069) (1.403) (1.400) (1.565) (1.282) (1.592)
Net Asset Value, End of Period $44.55 $41.64 $31.66 $43.28 $47.85 $55.62
Total Return3 7.16% 36.33% -23.55% -6.55% -11.48% 8.75%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $1,864 $1,771 $1,363 $1,793 $2,265 $2,968
Ratio of Total Expenses to Average Net Assets4 0.43% 0.41% 0.37% 0.32% 0.37% 0.38%
Ratio of Net Investment Income to Average Net Assets 4.02% 3.68% 4.49% 3.20% 2.42% 2.86%2
Portfolio Turnover Rate 8% 14% 55% 48% 31% 24%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Net investment income per share and the ratio of net investment income to average net assets include $.342 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.02%, (0.02%), (0.06%), (0.01%), and 0.00%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
9

 

Energy Fund
Financial Highlights
Admiral Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $78.12 $59.39 $81.18 $89.77 $104.35 $98.88
Investment Operations            
Net Investment Income1 1.870 2.615 2.787 2.926 2.511 2.8152
Net Realized and Unrealized Gain (Loss) on Investments 3.765 18.794 (21.903) (8.512) (14.600) 5.730
Total from Investment Operations 5.635 21.409 (19.116) (5.586) (12.089) 8.545
Distributions            
Dividends from Net Investment Income (.145) (2.679) (2.674) (3.004) (2.491) (3.075)
Distributions from Realized Capital Gains
Total Distributions (.145) (2.679) (2.674) (3.004) (2.491) (3.075)
Net Asset Value, End of Period $83.61 $78.12 $59.39 $81.18 $89.77 $104.35
Total Return3 7.22% 36.43% -23.47% -6.50% -11.40% 8.84%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $3,911 $3,608 $2,751 $4,388 $5,606 $6,796
Ratio of Total Expenses to Average Net Assets4 0.35% 0.33% 0.29% 0.24% 0.29% 0.30%
Ratio of Net Investment Income to Average Net Assets 4.10% 3.76% 4.60% 3.28% 2.50% 2.94%2
Portfolio Turnover Rate 8% 14% 55% 48% 31% 24%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Net investment income per share and the ratio of net investment income to average net assets include $.643 and 0.67%, respectively, resulting from a cash payment received in connection with the merger of General Electric Co. and Baker Hughes Inc. in July 2017.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.02%, (0.02%), (0.06%), (0.01%), and 0.00%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
10

 

Energy Fund
Notes to Financial Statements
Vanguard Energy Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master
11

 

Energy Fund
repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple
12

 

Energy Fund
Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
Taxes on foreign dividends and capital gains have been provided for in accordance with the fund's understanding of the applicable countries' tax rules and rates. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized gains. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the MSCI ACWI Energy Index for periods prior to October 21, 2020, and to the current benchmark MSCI ACWI Energy + Utilities Index, beginning October 21, 2020, for the preceding three years. The benchmark change will be fully phased in by October 2023. For the six months ended July 31, 2022, the investment advisory fee paid represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net increase of $1,100,000 (0.04%) based on performance.
13

 

Energy Fund
C. In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $212,000, representing less than 0.01% of the fund’s net assets and 0.08% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks—North and South America 3,542,352 3,542,352
Common Stocks—Other 453,759 1,744,490 2,198,249
Temporary Cash Investments 104 35,600 35,704
Total 3,996,215 1,780,090 5,776,305
E. As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 4,321,830
Gross Unrealized Appreciation 1,644,028
Gross Unrealized Depreciation (189,553)
Net Unrealized Appreciation (Depreciation) 1,454,475
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $690,633,000 that
14

 

Energy Fund
may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
F. During the six months ended July 31, 2022, the fund purchased $670,288,000 of investment securities and sold $471,214,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were:
    
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 351,446 8,031   433,225 11,662
Issued in Lieu of Cash Distributions 2,780 63   53,100 1,381
Redeemed (379,204) (8,791)   (500,894) (13,551)
Net Increase (Decrease)—Investor Shares (24,978) (697)   (14,569) (508)
Admiral Shares          
Issued 742,812 9,053   851,809 12,163
Issued in Lieu of Cash Distributions 6,048 74   105,042 1,455
Redeemed (690,256) (8,534)   (948,916) (13,745)
Net Increase (Decrease)—Admiral Shares 58,604 593   7,935 (127)
H. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
15

 

Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Energy Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For the advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the advisor.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decisions.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. The investment team uses a bottom-up approach in which stocks are selected based on the advisor’s estimates of fundamental investment value. Fundamental research focuses on the quality of a company’s assets, the company’s internal reinvestment opportunities, and management quality. The firm has advised the fund since its inception in 1984.
The board concluded that the advisor’s experience, stability, depth, and performance, among other factors, warranted the continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
16

 

Cost
The board concluded that the fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory expense rate was also below the peer-group average.
The board did not consider the profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets managed by Wellington Management increase.
The board will consider whether to renew Wellington Management’s advisory arrangement again after a one-year period.
17

 

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Energy Fund's Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
18

 

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You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q512 092022

 

 

Semiannual Report  |  July 31, 2022
Vanguard Global Capital Cycles Fund

 


 

About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund‘s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

 

Six Months Ended July 31, 2022      
Global Capital Cycles Fund Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return $1,000.00 $965.90 $2.05
Based on Hypothetical 5% Yearly Return 1,000.00 1,022.71 2.11
The calculations are based on expenses incurred in the most recent six-month period. The fund's annualized six-month expense ratio for that period is 0.42%. The dollar amounts shown as ”Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

 

Global Capital Cycles Fund
Fund Allocation
As of July 31, 2022
 
United States 31.0%
United Kingdom 21.7
Canada 16.4
India 4.9
France 4.4
China 3.7
Australia 3.1
Switzerland 2.4
Brazil 2.3
Japan 2.0
Italy 1.7
Sweden 1.6
South Korea 1.5
Germany 1.4
Spain 1.2
Other 0.7
The table reflects the fund's investments, except for short-term investments.
3

 

Global Capital Cycles Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
          Shares Market
Value

($000)
Common Stocks (99.0%)
Australia (3.0%)
1 BHP Group Ltd. ADR    409,441    22,536
BHP Group Ltd. (XASX)    677,588    18,542
                      41,078
Austria (0.7%)
*,2 BAWAG Group AG    200,181     9,242
Brazil (2.3%)
Vale SA Class B ADR  1,154,895    15,545
* Cia de Saneamento Basico do Estado de Sao Paulo ADR  1,801,888    15,442
                      30,987
Canada (16.3%)
Barrick Gold Corp.  7,147,189   112,497
Intact Financial Corp.    544,638    81,065
Endeavour Mining plc    855,528    16,876
Agnico Eagle Mines Ltd.    243,910    10,486
                     220,924
China (3.7%)
Ping An Insurance Group Co. of China Ltd. Class H  3,189,000    18,742
* Baidu Inc. Class A    918,499    15,876
* Contemporary Amperex Technology Co. Ltd. Class A    113,600     8,632
* XPeng Inc. Class A ADR    296,216     7,236
                      50,486
France (4.3%)
STMicroelectronics NV  1,016,089    38,452
Rubis SCA    830,232    20,292
                      58,744
Germany (1.4%)
Bayer AG (Registered)    333,267    19,440
India (4.8%)
Power Grid Corp. of India Ltd. 24,170,822    65,456
          Shares Market
Value

($000)
Italy (1.7%)
UniCredit SpA  2,313,397    22,879
Japan (2.0%)
Mitsubishi UFJ Financial Group Inc.  2,247,800    12,665
T&D Holdings Inc.    711,540     8,053
Panasonic Holdings Corp.    793,400     6,551
                      27,269
South Korea (1.5%)
* Coupang Inc. Class A  1,144,625    19,791
Spain (1.2%)
*,1 Grifols SA  1,142,445    16,670
Sweden (1.5%)
SKF AB Class B  1,252,691    21,082
Switzerland (2.4%)
Novartis AG (Registered)    373,666    32,109
United Kingdom (21.5%)
* Glencore plc 16,923,095    95,915
Anglo American plc  1,303,992    47,133
Unilever plc    811,595    39,527
1 Rio Tinto plc ADR    567,573    34,639
Serco Group plc 10,766,538    24,770
Standard Chartered plc  2,917,552    20,110
* Babcock International Group plc  4,009,566    16,768
Centamin plc 13,244,415    13,391
                     292,253
United States (30.7%)
American Electric Power Co. Inc.    712,474    70,221
BWX Technologies Inc.  1,201,722    68,114
Medical Properties Trust Inc.  2,496,769    43,044
Viper Energy Partners LP  1,212,762    37,280
* Enstar Group Ltd.    175,285    34,692
* Livent Corp.  1,174,668    29,238
* Fluor Corp.  1,085,118    27,573
Schlumberger NV    714,535    26,459
Intel Corp.    668,161    24,261
4

 

Global Capital Cycles Fund
          Shares Market
Value

($000)
Merck & Co. Inc.    267,474    23,896
* Salesforce Inc.     75,516    13,897
Mosaic Co.    205,876    10,841
* Diamond Offshore Drilling Inc.  1,165,041     7,864
* Metals Acquisition Corp. Warrants Exp. 7/12/26    330,300       139
                     417,519
Total Common Stocks
(Cost $1,276,855)
1,345,929
Temporary Cash Investments (2.9%)
Money Market Fund (2.9%)
3,4 Vanguard Market Liquidity Fund, 1.903% (Cost $39,342)    393,596    39,344
Total Investments (101.9%)
(Cost $1,316,197)
  1,385,273
Other Assets and Liabilities—Net (-1.9%)   (26,321)
Net Assets (100%)   1,358,952
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $33,395,000.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At July 31, 2022, the aggregate value was $9,242,000, representing 0.7% of net assets.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
4 Collateral of $35,196,000 was received for securities on loan, of which $35,180,000 is held in Vanguard Market Liquidity Fund and $16,000 is held in cash.
  ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
5

 

Global Capital Cycles Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $1,276,855) 1,345,929
Affiliated Issuers (Cost $39,342) 39,344
Total Investments in Securities 1,385,273
Investment in Vanguard 52
Cash 16
Foreign Currency, at Value (Cost $213) 208
Receivables for Investment Securities Sold 18,243
Receivables for Accrued Income 637
Receivables for Capital Shares Issued 1,558
Total Assets 1,405,987
Liabilities  
Due to Custodian 1,108
Payables for Investment Securities Purchased 6,775
Collateral for Securities on Loan 35,196
Payables for Capital Shares Redeemed 642
Payables to Investment Advisor 674
Payables to Vanguard 132
Deferred Foreign Capital Gains Taxes 2,508
Total Liabilities 47,035
Net Assets 1,358,952
1 Includes $33,395 of securities on loan.  

At July 31, 2022, net assets consisted of:

   
Paid-in Capital 3,387,659
Total Distributable Earnings (Loss) (2,028,707)
Net Assets 1,358,952
   
Net Assets  
Applicable to 124,857,428 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
1,358,952
Net Asset Value Per Share $10.88
See accompanying Notes, which are an integral part of the Financial Statements.
6

 

Global Capital Cycles Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends1 25,872
Non-Cash Dividends 5,209
Interest2 110
Securities Lending—Net 103
Total Income 31,294
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 1,060
Performance Adjustment 307
The Vanguard Group—Note C  
Management and Administrative 1,569
Marketing and Distribution 44
Custodian Fees 24
Shareholders’ Reports 25
Trustees’ Fees and Expenses
Other Expenses 5
Total Expenses 3,034
Net Investment Income 28,260
Realized Net Gain (Loss)  
Investment Securities Sold2 70,888
Foreign Currencies (469)
Realized Net Gain (Loss) 70,419
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2,3 (155,940)
Foreign Currencies (55)
Change in Unrealized Appreciation (Depreciation) (155,995)
Net Increase (Decrease) in Net Assets Resulting from Operations (57,316)
1 Dividends are net of foreign withholding taxes of $1,861,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $110,000, ($24,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
3 The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($597,000).
See accompanying Notes, which are an integral part of the Financial Statements.
7

 

Global Capital Cycles Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 28,260   43,390
Realized Net Gain (Loss) 70,419   166,516
Change in Unrealized Appreciation (Depreciation) (155,995)   41,453
Net Increase (Decrease) in Net Assets Resulting from Operations (57,316)   251,359
Distributions      
Total Distributions (2,167)   (42,400)
Capital Share Transactions      
Issued 242,675   228,666
Issued in Lieu of Cash Distributions 1,861   36,640
Redeemed (185,599)   (296,930)
Net Increase (Decrease) from Capital Share Transactions 58,937   (31,624)
Total Increase (Decrease) (546)   177,335
Net Assets      
Beginning of Period 1,359,498   1,182,163
End of Period 1,358,952   1,359,498
See accompanying Notes, which are an integral part of the Financial Statements.
8

 

Global Capital Cycles Fund
Financial Highlights
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $11.28 $9.57 $7.97 $7.62 $10.57 $10.74
Investment Operations            
Net Investment Income1 .224 .356 .197 .212 .122 .049
Net Realized and Unrealized Gain (Loss) on Investments (.607) 1.715 1.597 .337 (2.858) (.217)
Total from Investment Operations (.383) 2.071 1.794 .549 (2.736) (.168)
Distributions            
Dividends from Net Investment Income (.017) (.361) (.194) (.199) (.214) (.002)
Distributions from Realized Capital Gains
Total Distributions (.017) (.361) (.194) (.199) (.214) (.002)
Net Asset Value, End of Period $10.88 $11.28 $9.57 $7.97 $7.62 $10.57
Total Return2 -3.41% 21.74% 22.63% 7.11% -26.17% -1.56%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $1,359 $1,359 $1,182 $1,212 $1,399 $2,568
Ratio of Total Expenses to Average Net Assets3 0.42% 0.36% 0.35% 0.38% 0.33% 0.36%
Ratio of Net Investment Income to Average Net Assets 3.90% 3.28% 2.43% 2.68% 1.38% 0.47%
Portfolio Turnover Rate 32% 57% 70% 56% 110% 35%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.04%, (0.01%), (0.03%), 0.00%, (0.04%), and 0.00%.
See accompanying Notes, which are an integral part of the Financial Statements.
9

 

Global Capital Cycles Fund
Notes to Financial Statements
Vanguard Global Capital Cycles Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund performance.
A.  The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
10

 

Global Capital Cycles Fund
5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
11

 

Global Capital Cycles Fund
7. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
Taxes on foreign dividends and capital gains have been provided for in accordance with the fund’s understanding of the applicable countries’ tax rules and rates. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized gains. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
B.  Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the Custom Global Capital Cycles Index since January 31, 2019. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net increase of $307,000 (0.04%) based on performance.
C.  In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $52,000, representing less than 0.01% of the fund’s net assets and 0.02% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D.  Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
12

 

Global Capital Cycles Fund
The following table summarizes the market value of the fund's investments as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks—North and South America 669,430 669,430
Common Stocks—Other 84,202 592,297 676,499
Temporary Cash Investments 39,344 39,344
Total 792,976 592,297 1,385,273
E.  As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 1,316,197
Gross Unrealized Appreciation 193,629
Gross Unrealized Depreciation (124,553)
Net Unrealized Appreciation (Depreciation) 69,076
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,193,799,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
F.  During the six months ended July 31, 2022, the fund purchased $561,565,000 of investment securities and sold $445,888,000 of investment securities, other than temporary cash investments.
G.  Capital shares issued and redeemed were:
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Shares
(000)
  Shares
(000)
Issued 20,393   21,067
Issued in Lieu of Cash Distributions 150   3,333
Redeemed (16,213)   (27,397)
Net Increase (Decrease) in Shares Outstanding 4,330   (2,997)
H.  Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
13

 

Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Global Capital Cycles Fund (formerly known as Vanguard Precious Metals and Mining Fund) has renewed the fund’s investment advisory arrangement with Wellington Management Company llp (Wellington Management). The board determined that renewing the fund’s investment advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the advisor.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the investment management services provided to the fund since Wellington Management began managing the fund in September 2018; it also took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. The advisor follows a global equity strategy that seeks to provide investors with uncorrelated returns to other asset classes through a blend of capital cycle and enduring assets. Identification of potential investments begins with the capital cycles framework, which seeks companies that are positioned to succeed through unique and superior business models and healthy balance sheets in sectors and industries where there is capital destruction, consolidation, or retrenchment of investment. Valuation and quality factors such as discount to intrinsic value, cash generation, capital expenditure, and future capital deployment opportunities are considered.
The board concluded that the advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the performance of Wellington Management since it began managing the fund in 2018, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
14

 

Cost
The board concluded that the fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also below the peer-group average.
The board did not consider the profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
15

 

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global Capital Cycles Fund’s Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
16

 

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© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q532 092022

 

 

Semiannual Report   |   July 31, 2022
Vanguard Health Care Fund

 

Contents
About Your Fund’s Expenses

1
Financial Statements

4
Trustees Approve Advisory Arrangement

19
Liquidity Risk Management

21

 

About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

 

Six Months Ended July 31, 2022      
  Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Health Care Fund      
Investor Shares $1,000.00 $1,025.80 $1.61
Admiral™ Shares 1,000.00 1,026.10 1.36
Based on Hypothetical 5% Yearly Return      
Health Care Fund      
Investor Shares $1,000.00 $1,023.21 $1.61
Admiral Shares 1,000.00 1,023.46 1.35
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.32% for Investor Shares and 0.27% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

 

Health Care Fund
Fund Allocation
As of July 31, 2022
United States 72.9%
Japan 8.7
United Kingdom 6.3
Switzerland 5.2
Belgium 3.0
Denmark 2.0
China 1.1
Other 0.8
The table reflects the fund’s investments, except for short-term investments.
3

 

Health Care Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (98.1%)
Belgium (2.9%)
1 UCB SA 10,288,169    803,905
* Argenx SE  1,377,888    503,344
* Galapagos NV  1,175,458     59,636
       1,366,885
Brazil (0.0%)
2 Hapvida Participacoes e Investimentos SA  8,909,471     10,607
China (1.0%)
2 WuXi AppTec Co. Ltd. Class H  9,838,416    119,184
* Legend Biotech Corp. ADR  1,483,204     70,067
*,2 Wuxi Biologics Cayman Inc.  6,756,200     64,671
* Zai Lab Ltd. 14,229,400     58,277
  Yifeng Pharmacy Chain Co. Ltd. Class A  6,945,794     53,403
* Zai Lab Ltd. ADR  1,085,794     44,007
  Shandong Weigao Group Medical Polymer Co. Ltd. Class H 24,872,000     31,111
  Shenzhen Mindray Bio-Medical Electronics Co. Ltd. Class A (XSHE)    452,517     19,479
*,2 Remegen Co. Ltd. Class H  2,409,000     13,791
*,2 Akeso Inc.  3,657,000      9,785
*,2 Everest Medicines Ltd.  2,139,500      4,430
         488,205
Denmark (2.0%)
* Genmab A/S  2,088,852    743,256
* Genmab A/S ADR  3,150,246    112,212
*,3 Ascendis Pharma A/S ADR    942,809     80,638
         936,106
Germany (0.0%)
* MorphoSys AG    883,482     19,643
Italy (0.3%)
  DiaSorin SpA    552,359     76,801
  Amplifon SpA  1,439,109     47,589
         124,390
    Shares Market
Value

($000)
Japan (8.6%)
  Daiichi Sankyo Co. Ltd. 45,692,990  1,211,537
1 Eisai Co. Ltd. 17,856,177    817,721
  Astellas Pharma Inc. 44,471,600    696,487
  Ono Pharmaceutical Co. Ltd. 19,628,460    551,931
  Chugai Pharmaceutical Co. Ltd. 11,038,000    310,089
  Terumo Corp.  8,498,900    290,183
  Nippon Shinyaku Co. Ltd.  1,977,800    122,409
  Asahi Intecc Co. Ltd.  2,023,500     37,435
       4,037,792
Netherlands (0.4%)
  Koninklijke Philips NV 10,091,245    208,851
Spain (0.1%)
  Almirall SA  3,142,775     30,343
Switzerland (5.1%)
  Novartis AG (Registered) 21,530,502  1,850,109
  Alcon Inc.  3,393,208    267,059
  Lonza Group AG (Registered)    352,632    214,313
  Tecan Group AG (Registered)    203,082     72,122
       2,403,603
United Kingdom (6.2%)
  AstraZeneca plc 19,803,082  2,604,923
  Hikma Pharmaceuticals plc  6,910,934    146,076
*,3 Abcam plc ADR  5,880,982     87,862
  Genus plc  1,004,385     34,785
* Abcam plc  1,281,015     19,145
       2,892,791
United States (71.5%)
  UnitedHealth Group Inc.  6,341,208  3,439,091
  Eli Lilly & Co.  8,418,102  2,775,364
  Pfizer Inc. 54,285,423  2,741,957
  Bristol-Myers Squibb Co. 19,516,668  1,439,940
  Elevance Health Inc.  2,851,578  1,360,488
  Danaher Corp.  4,344,265  1,266,223
* Vertex Pharmaceuticals Inc.  4,412,004  1,237,170
  Thermo Fisher Scientific Inc.  2,024,414  1,211,430
* Boston Scientific Corp. 29,297,185  1,202,649
  Stryker Corp.  5,344,795  1,147,795
* Biogen Inc.  5,192,274  1,116,650
4

 

Health Care Fund
    Shares Market
Value

($000)
  Humana Inc.  2,186,329  1,053,811
* Edwards Lifesciences Corp.  9,131,833    918,114
* Regeneron Pharmaceuticals Inc.  1,533,348    891,933
* Centene Corp.  8,630,836    802,409
* Seagen Inc.  4,431,828    797,640
* Alnylam Pharmaceuticals Inc.  5,036,278    715,353
* Incyte Corp.  9,000,425    699,153
  Zoetis Inc.  3,528,663    644,157
* Moderna Inc.  3,816,417    626,236
  Baxter International Inc. 10,552,096    618,986
  HCA Healthcare Inc.  2,874,896    610,685
* Insulet Corp.  2,003,249    496,405
  Agilent Technologies Inc.  3,576,445    479,601
  Laboratory Corp. of America Holdings  1,485,818    389,567
* IQVIA Holdings Inc.  1,559,767    374,765
*,3 agilon health Inc. 12,060,922    301,885
* Waters Corp.    811,122    295,273
  Teleflex Inc.  1,217,493    292,758
* Align Technology Inc.    993,443    279,128
* DexCom Inc.  3,102,951    254,690
* Sarepta Therapeutics Inc.  2,273,611    211,332
* Illumina Inc.    946,867    205,167
* Molina Healthcare Inc.    584,853    191,668
  Universal Health Services Inc. Class B  1,622,122    182,440
* Apellis Pharmaceuticals Inc.  3,222,912    181,385
* Acadia Healthcare Co. Inc.  1,832,464    151,930
* Syneos Health Inc.  1,911,256    151,257
  Royalty Pharma plc Class A  3,053,455    132,795
* Exact Sciences Corp.  2,807,222    126,606
  Viatris Inc. 12,951,732    125,502
*,1 Ironwood Pharmaceuticals Inc. Class A 10,902,066    124,829
* Intra-Cellular Therapies Inc.  2,295,196    124,216
* Alkermes plc  4,619,968    118,271
*,1 Agios Pharmaceuticals Inc.  5,148,413    111,051
* Mirati Therapeutics Inc.  1,723,798    111,013
* Oak Street Health Inc.  2,978,154     86,217
* Cytokinetics Inc.  1,678,045     71,032
* Karuna Therapeutics Inc.    514,899     67,066
* Blueprint Medicines Corp.  1,306,248     66,697
  Encompass Health Corp.  1,118,557     56,621
* PTC Therapeutics Inc.  1,235,744     53,817
* Glaukos Corp.    934,746     50,336
* Amedisys Inc.    408,358     48,942
* Ultragenyx Pharmaceutical Inc.    900,000     47,952
*,1 Nektar Therapeutics Class A 11,383,721     45,079
* REVOLUTION Medicines Inc.  1,881,501     42,503
* Reata Pharmaceuticals Inc. Class A  1,237,211     37,958
* Amicus Therapeutics Inc.  3,307,491     32,943
*,1 2seventy bio Inc.  2,046,666     29,451
* Sage Therapeutics Inc.    772,758     26,591
    Shares Market
Value

($000)
*,1 Bluebird Bio Inc.  4,897,789     19,836
* TG Therapeutics Inc.  3,066,304     18,367
* NanoString Technologies Inc.  1,416,596     18,132
* Rocket Pharmaceuticals Inc.  1,199,337     17,390
* Relay Therapeutics Inc.    909,447     17,298
  Enhabit Inc.    559,278      9,793
* ALX Oncology Holdings Inc.    978,377      9,471
      33,604,260
Total Common Stocks (Cost $28,617,347) 46,123,476
Temporary Cash Investments (2.0%)
Money Market Fund (0.0%)
4,5 Vanguard Market Liquidity Fund 1.903%      53,511      5,349
    Face
Amount
($000)
 
Repurchase Agreements (1.1%)
  Bank of America Securities, LLC, 2.300%, 8/1/22
(Dated 7/29/22, Repurchase Value $29,406,000, collateralized by Ginnie Mae 2.000%–3.000%, 6/20/50–1/20/52, with a value of $29,988,000) 
    29,400     29,400
  Bank of Nova Scotia, 2.250%, 8/1/22
(Dated 7/29/22, Repurchase Value $20,004,000, collateralized by U.S. Treasury Note/Bond 0.250%–3.000%, 3/15/24–2/15/48, with a value of $20,404,000) 
    20,000     20,000
  Barclays Capital Inc., 2.220%, 8/1/22
(Dated 7/29/22, Repurchase Value $51,910,000, collateralized by U.S. Treasury Note/Bond 2.625%, 5/31/27, with a value of $52,938,000) 
    51,900     51,900
 
5

 

Health Care Fund
    Face
Amount
($000)
Market
Value

($000)
  BNP Paribas Securities Corp., 2.280%, 8/1/22
(Dated 7/29/22, Repurchase Value $22,604,000, collateralized by Fannie Mae 2.918%–6.020%, 10/1/33–5/1/52, Freddie Mac 4.500%, 7/1/52, and Ginnie Mae 2.500%, 10/20/51, with a value of $23,052,000) 
    22,600     22,600
  Credit Agricole Securities, 2.220%, 8/1/22
(Dated 7/29/22, Repurchase Value $60,711,000, collateralized by U.S. Treasury Note/Bond 2.875%, 5/15/52, with a value of $61,914,000) 
    60,700     60,700
  HSBC Bank USA, 2.240%, 8/1/22
(Dated 7/29/22, Repurchase Value $25,205,000, collateralized by U.S. Treasury Note/Bond 2.125%–2.250%, 5/31/26–5/15/41, with a value of $25,704,000) 
    25,200     25,200
  HSBC Bank USA, 2.300%, 8/1/22
(Dated 7/29/22, Repurchase Value $41,108,000, collateralized by Fannie Mae 2.500%–4.500%, 3/1/44–6/1/52, and Freddie Mac 3.000%–5.500%, 3/1/52–7/1/52, with a value of $41,922,000) 
    41,100     41,100
  Natixis SA, 2.220%, 8/1/22
(Dated 7/29/22, Repurchase Value $195,236,000, collateralized by Federal Home Loan Bank 2.080%–2.840%, 1/27/42–9/25/45, U.S. Treasury Bill 0.000%, 10/20/22, U.S. Treasury Inflation Indexed Note/Bond 2.461%, 4/30/24, and U.S. Treasury Note/Bond 0.250%–4.500%, 1/31/23–5/15/52, with a value of $199,104,000) 
   195,200    195,200
    Face
Amount
($000)
Market
Value

($000)
  Nomura International plc, 2.250%, 8/1/22
(Dated 7/29/22, Repurchase Value $23,604,000, collateralized by U.S. Treasury Note/Bond 2.000%–2.250%, 11/15/24–2/15/50, with a value of $24,072,000) 
    23,600     23,600
  RBC Capital Markets LLC, 2.280%, 8/1/22
(Dated 7/29/22, Repurchase Value $52,110,000, collateralized by U.S. Treasury Note/Bond 0.750%, 5/31/26, with a value of $53,142,000) 
    52,100     52,100
         521,800
U.S. Government and Agency Obligations (0.9%)
  Federal Home Loan Banks Discount Notes,
1.486%–1.487%, 8/09/22
   100,000     99,954
  Federal Home Loan Banks Discount Notes,
1.500%, 8/11/22
   150,000    149,914
  United States Cash Management Bill,
1.121%, 9/13/22
    19,955     19,903
  United States Cash Management Bill,
2.620%, 11/29/22
    75,000     74,348
 
6

 

Health Care Fund
    Face
Amount
($000)
Market
Value

($000)
  United States Treasury Bill,
0.885%, 8/11/22
   100,000     99,942
         444,061
Total Temporary Cash Investments (Cost $971,288) 971,210
Total Investments (100.1%) (Cost $29,588,635) 47,094,686
Other Assets and Liabilities—Net (-0.1%) (62,691)
Net Assets (100%) 47,031,995
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At July 31, 2022, the aggregate value was $222,468,000, representing 0.5% of net assets.
3 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $5,051,000.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Collateral of $5,257,000 was received for securities on loan.
  ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
7

 

Health Care Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $27,050,845) 45,137,465
Affiliated Issuers (Cost $2,537,790) 1,957,221
Total Investments in Securities 47,094,686
Investment in Vanguard 1,742
Cash 2,993
Foreign Currency, at Value (Cost $1,483) 1,357
Receivables for Investment Securities Sold 68,637
Receivables for Accrued Income 79,724
Receivables for Capital Shares Issued 5,881
Total Assets 47,255,020
Liabilities  
Payables for Investment Securities Purchased 185,172
Collateral for Securities on Loan 5,257
Payables to Investment Advisor 16,048
Payables for Capital Shares Redeemed 13,531
Payables to Vanguard 3,017
Total Liabilities 223,025
Net Assets 47,031,995
1 Includes $5,051 of securities on loan.  
At July 31, 2022, net assets consisted of:  
   
Paid-in Capital 28,545,204
Total Distributable Earnings (Loss) 18,486,791
Net Assets 47,031,995
 
Investor Shares—Net Assets  
Applicable to 35,627,660 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
7,424,465
Net Asset Value Per Share—Investor Shares $208.39
 
Admiral Shares—Net Assets  
Applicable to 450,697,541 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
39,607,530
Net Asset Value Per Share—Admiral Shares $87.88
  
See accompanying Notes, which are an integral part of the Financial Statements.
8

 

Health Care Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends—Unaffiliated Issuers1 300,789
Dividends—Affiliated Issuers2 21,965
Interest—Unaffiliated Issuers 2,462
Securities Lending—Net 1,145
Total Income 326,361
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 33,708
Performance Adjustment (3,084)
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 6,629
Management and Administrative—Admiral Shares 26,461
Marketing and Distribution—Investor Shares 206
Marketing and Distribution—Admiral Shares 486
Custodian Fees 372
Shareholders’ Reports—Investor Shares 69
Shareholders’ Reports—Admiral Shares 67
Trustees’ Fees and Expenses 12
Other Expenses 5
Total Expenses 64,931
Expenses Paid Indirectly (16)
Net Expenses 64,915
Net Investment Income 261,446
Realized Net Gain (Loss)  
Investment Securities Sold—Unaffiliated Issuers 1,025,878
Investment Securities Sold—Affiliated Issuers (184,969)
Foreign Currencies (1,835)
Realized Net Gain (Loss) 839,074
Change in Unrealized Appreciation (Depreciation)  
Investment Securities—Unaffiliated Issuers 343,665
Investment Securities—Affiliated Issuers (245,033)
Foreign Currencies (2,452)
Change in Unrealized Appreciation (Depreciation) 96,180
Net Increase (Decrease) in Net Assets Resulting from Operations 1,196,700
1 Dividends are net of foreign withholding taxes of $16,752,000.
2 Dividends are net of foreign withholding taxes of $3,186,000.
  
See accompanying Notes, which are an integral part of the Financial Statements.
9

 

Health Care Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 261,446   430,364
Realized Net Gain (Loss) 839,074   4,838,005
Change in Unrealized Appreciation (Depreciation) 96,180   (2,985,233)
Net Increase (Decrease) in Net Assets Resulting from Operations 1,196,700   2,283,136
Distributions      
Investor Shares (272,400)   (650,696)
Admiral Shares (1,454,452)   (3,443,247)
Total Distributions (1,726,852)   (4,093,943)
Capital Share Transactions      
Investor Shares 18,917   (610,620)
Admiral Shares 116,004   737,980
Net Increase (Decrease) from Capital Share Transactions 134,921   127,360
Total Increase (Decrease) (395,231)   (1,683,447)
Net Assets      
Beginning of Period 47,427,226   49,110,673
End of Period 47,031,995   47,427,226
  
See accompanying Notes, which are an integral part of the Financial Statements.
10

 

Health Care Fund
Financial Highlights
Investor Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $210.54 $218.60 $204.57 $203.34 $215.96 $189.88
Investment Operations            
Net Investment Income1 1.111 1.869 2.005 2.506 2.375 2.162
Net Realized and Unrealized Gain (Loss) on Investments 4.457 8.949 29.203 23.326 2.489 38.929
Total from Investment Operations 5.568 10.818 31.208 25.832 4.864 41.091
Distributions            
Dividends from Net Investment Income (.124) (1.951) (1.886) (2.428) (2.323) (2.059)
Distributions from Realized Capital Gains (7.594) (16.927) (15.292) (22.174) (15.161) (12.952)
Total Distributions (7.718) (18.878) (17.178) (24.602) (17.484) (15.011)
Net Asset Value, End of Period $208.39 $210.54 $218.60 $204.57 $203.34 $215.96
Total Return2 2.58% 4.48% 16.16% 13.16% 2.76% 22.29%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $7,424 $7,493 $8,342 $8,729 $8,850 $9,853
Ratio of Total Expenses to Average Net Assets3 0.32%4 0.30% 0.32% 0.32% 0.34% 0.38%
Ratio of Net Investment Income to Average Net Assets 1.09% 0.82% 0.95% 1.25% 1.12% 1.02%
Portfolio Turnover Rate 8% 15% 18% 18% 16% 11%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.04%), (0.01%), (0.02%), 0.00%, and 0.04%.
4 The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.32%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
11

 

Health Care Fund
Financial Highlights
Admiral Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $88.77 $92.17 $86.27 $85.75 $91.08 $80.09
Investment Operations            
Net Investment Income1 .490 .830 .883 1.097 1.036 .938
Net Realized and Unrealized Gain (Loss) on Investments 1.885 3.780 12.316 9.844 1.057 16.436
Total from Investment Operations 2.375 4.610 13.199 10.941 2.093 17.374
Distributions            
Dividends from Net Investment Income (.063) (.870) (.849) (1.068) (1.027) (.920)
Distributions from Realized Capital Gains (3.202) (7.140) (6.450) (9.353) (6.396) (5.464)
Total Distributions (3.265) (8.010) (7.299) (10.421) (7.423) (6.384)
Net Asset Value, End of Period $87.88 $88.77 $92.17 $86.27 $85.75 $91.08
Total Return2 2.61% 4.53% 16.21% 13.22% 2.81% 22.35%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $39,608 $39,934 $40,769 $38,126 $37,888 $39,214
Ratio of Total Expenses to Average Net Assets3 0.27%4 0.25% 0.27% 0.27% 0.28% 0.33%
Ratio of Net Investment Income to Average Net Assets 1.13% 0.86% 0.99% 1.30% 1.18% 1.07%
Portfolio Turnover Rate 8% 15% 18% 18% 16% 11%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.04%), (0.01%), (0.02%), 0.00%, and 0.04%.
4 The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.27%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
12

 

Health Care Fund
Notes to Financial Statements
Vanguard Health Care Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master
13

 

Health Care Fund
repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple
14

 

Health Care Fund
Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
Taxes on foreign dividends and capital gains have been provided for in accordance with the fund's understanding of the applicable countries' tax rules and rates. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized gains. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the MSCI All Country World Health Care Index for the preceding three years. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a net decrease of $3,084,000 (0.01%) based on performance.
15

 

Health Care Fund
C. In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $1,742,000, representing less than 0.01% of the fund’s net assets and 0.70% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund has asked its investment advisor to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended July 31, 2022, these arrangements reduced the fund’s expenses by $16,000 (an annual rate of less than 0.01% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks—North and South America 33,614,867 33,614,867
Common Stocks—Other 394,786 12,113,823 12,508,609
Temporary Cash Investments 5,349 965,861 971,210
Total 34,015,002 13,079,684 47,094,686
16

 

Health Care Fund
F. As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 29,706,461
Gross Unrealized Appreciation 20,781,534
Gross Unrealized Depreciation (3,393,309)
Net Unrealized Appreciation (Depreciation) 17,388,225
G. During the six months ended July 31, 2022, the fund purchased $3,533,136,000 of investment securities and sold $4,865,990,000 of investment securities, other than temporary cash investments.
H. Capital share transactions for each class of shares were:
    
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 199,046 962   629,952 2,783
Issued in Lieu of Cash Distributions 255,615 1,203   609,552 2,709
Redeemed (435,744) (2,129)   (1,850,124) (8,061)
Net Increase (Decrease)—Investor Shares 18,917 36   (610,620) (2,569)
Admiral Shares          
Issued 453,772 5,234   1,787,859 18,432
Issued in Lieu of Cash Distributions 1,284,039 14,337   3,027,419 31,867
Redeemed (1,621,807) (18,710)   (4,077,298) (42,774)
Net Increase (Decrease)—Admiral Shares 116,004 861   737,980 7,525
17

 

Health Care Fund
I. Certain of the fund’s investments were in companies that were considered to be affiliated companies of the fund because the fund owned more than 5% of the outstanding voting securities of the company or the issuer was another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:
    Current Period Transactions  
  Jan. 31,
2022
Market
Value
($000)
Purchases
at Cost
($000)
Proceeds
from
Securities
Sold
($000)
Realized
Net
Gain
(Loss)
($000)
Change in
Unrealized
App. (Dep.)
($000)
Income
($000)
Capital Gain
Distributions
Received
($000)
Jul. 31,
2022
Market
Value
($000)
2seventy bio Inc. 38,211 (8,760) 29,451
Agios Pharmaceuticals Inc. 159,034 (47,983) 111,051
Alkermes plc 301,083 201,154 (86,001) 104,343 NA1
Bluebird Bio Inc. 48,445 5,159 (113,062) 89,612 19,836
Eisai Co. Ltd. 894,327 (76,606) 10,553 817,721
Ironwood Pharmaceuticals Inc. Class A 121,558 3,271 124,829
Nektar Therapeutics Class A 126,587 (81,508) 45,079
UCB SA 1,018,749 45,278 46,817 14,097 (227,402) 11,412 803,905
Vanguard Market Liquidity Fund 4,711 NA2 NA2 (3) 5,349
Total 2,712,705 45,278 253,130 (184,969) (245,033) 21,965 1,957,221
1 Not applicable—at July 31, 2022, the security was still held, but the issuer was no longer an affiliated company of the fund.
2 Not applicable—purchases and sales are for temporary cash investment purposes.
J. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
18

 

Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Health Care Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company LLP (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the advisor.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. The portfolio manager is aided by a team of experienced Global Industry Analysts who cover health care industries. This health care team uses intensive fundamental analysis and deep knowledge of health care science and technology to identify companies with high-quality balance sheets, strong management, and the potential for new products that will lead to above-average growth in revenue and earnings. The advisor invests in stocks broadly representing the health care industry, seeking to maintain exposure across five primary subsectors: large-cap biotech/pharmaceuticals, mid-cap biotech/pharmaceuticals, small-cap biotech/pharmaceuticals, health care services, and medical technology. Wellington Management has advised the fund since its inception in 1984.
The board concluded that the advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
19

 

Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
Cost
The board concluded that the fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also below the peer-group average.
The board did not consider the profitability of Wellington Management in determining whether to approve the advisory fee because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule for Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
20

 

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Health Care Fund's Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
21

 

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You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q522 092022

 

 

Semiannual Report  |  July 31, 2022
Vanguard Real Estate Index Funds
Vanguard Real Estate Index Fund
Vanguard Real Estate II Index Fund


About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund‘s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

Six Months Ended July 31, 2022      
  Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Real Estate Index Fund      
Investor Shares $1,000.00 $ 939.70 $1.20
ETF Shares 1,000.00 940.50 0.58
Admiral™ Shares 1,000.00 940.60 0.58
Institutional Shares 1,000.00 940.50 0.48
Real Estate II Index Fund $1,000.00 $ 940.70 $0.38
Based on Hypothetical 5% Yearly Return      
Real Estate Index Fund      
Investor Shares $1,000.00 $1,023.56 $1.25
ETF Shares 1,000.00 1,024.20 0.60
Admiral Shares 1,000.00 1,024.20 0.60
Institutional Shares 1,000.00 1,024.30 0.50
Real Estate II Index Fund $1,000.00 $1,024.40 $0.40
The calculations are based on expenses incurred in the most recent six-month period. The funds’ annualized six-month expense ratios for that period are: for the Real Estate Index Fund, 0.25% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral Shares, and 0.10% for Institutional Shares; and for the Real Estate II Index Fund, 0.08%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

Real Estate Index Fund
Fund Allocation
As of July 31, 2022
Diversified Real Estate Activities 0.1%
Diversified REITs 2.7
Health Care REITs 8.1
Hotel & Resort REITs 2.6
Industrial REITs 11.8
Office REITs 5.9
Real Estate Development 0.2
Real Estate Operating Companies 0.5
Real Estate Services 4.0
Residential REITs 15.1
Retail REITs 11.3
Specialized REITs 37.7
The table reflects the fund’s investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
3

Real Estate Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
          Shares Market
Value

($000)
Equity Real Estate Investment Trusts (REITs) (95.2%)
Diversified REITs (2.4%)
WP Carey Inc.   8,743,103    780,759
STORE Capital Corp.  11,303,279    328,021
Broadstone Net Lease Inc.   7,497,078    169,959
Essential Properties Realty Trust Inc.   5,761,575    138,969
Global Net Lease Inc.   4,765,303     71,908
American Assets Trust Inc.   2,359,709     71,334
Alexander & Baldwin Inc.   3,326,594     66,233
Empire State Realty Trust Inc. Class A   6,595,841     56,263
iStar Inc.   3,167,456     52,928
Armada Hoffler Properties Inc.   3,084,492     43,738
Gladstone Commercial Corp.   1,731,930     36,284
One Liberty Properties Inc.     768,149     21,316
                     1,837,712
Health Care REITs (7.1%)
Welltower Inc.  19,766,417  1,706,632
Ventas Inc.  18,324,532    985,493
Healthpeak Properties Inc.  24,737,357    683,493
Medical Properties Trust Inc.  27,375,325    471,951
1 Healthcare Realty Trust Inc. Class A  17,462,874    458,400
Omega Healthcare Investors Inc.  10,967,903    340,005
Physicians Realty Trust  10,318,085    183,352
Sabra Health Care REIT Inc.  10,591,234    162,999
National Health Investors Inc.   2,103,159    136,369
CareTrust REIT Inc.   4,451,645     91,927
LTC Properties Inc.   1,811,743     75,912
Community Healthcare Trust Inc.   1,091,309     42,507
          Shares Market
Value

($000)
Global Medical REIT Inc.   2,797,902     34,079
Universal Health Realty Income Trust     599,909     32,335
Diversified Healthcare Trust  10,977,598     18,991
                     5,424,445
Hotel & Resort REITs (2.3%)
Host Hotels & Resorts Inc.  32,757,517    583,411
* Ryman Hospitality Properties Inc.   2,399,581    212,459
Park Hotels & Resorts Inc.  10,846,779    169,101
Apple Hospitality REIT Inc.   9,946,332    165,905
Pebblebrook Hotel Trust   6,031,229    117,971
* Sunstone Hotel Investors Inc.  10,060,581    113,986
RLJ Lodging Trust   7,640,761     95,433
* DiamondRock Hospitality Co.   9,666,781     89,708
* Xenia Hotels & Resorts Inc.   5,238,792     86,021
Service Properties Trust   7,578,116     49,561
* Summit Hotel Properties Inc.   4,873,237     38,255
* Chatham Lodging Trust   2,123,237     25,819
                     1,747,630
Industrial REITs (10.3%)
Prologis Inc.  33,943,300  4,499,524
Duke Realty Corp.  17,557,346  1,098,387
Rexford Industrial Realty Inc.   7,363,812    481,667
Americold Realty Trust Inc.  12,305,953    403,020
EastGroup Properties Inc.   1,892,111    322,680
First Industrial Realty Trust Inc.   6,044,767    314,026
STAG Industrial Inc.   8,162,623    267,571
Terreno Realty Corp.   3,462,935    216,953
LXP Industrial Trust  13,102,576    143,735
4

Real Estate Index Fund
          Shares Market
Value

($000)
Innovative Industrial Properties Inc.   1,175,398    113,320
Plymouth Industrial REIT Inc.   1,675,476     32,270
Industrial Logistics Properties Trust   2,996,099     30,051
                     7,923,204
Office REITs (5.2%)
Alexandria Real Estate Equities Inc.   6,969,646  1,155,428
Boston Properties Inc.   6,827,275    622,374
Kilroy Realty Corp.   4,818,279    261,054
Vornado Realty Trust   7,474,866    227,161
Cousins Properties Inc.   6,820,035    210,398
Douglas Emmett Inc.   8,060,010    190,539
Highwoods Properties Inc.   4,811,285    171,137
1 SL Green Realty Corp.   2,970,817    147,501
* Equity Commonwealth   5,187,537    145,510
Corporate Office Properties Trust   5,152,111    145,032
JBG SMITH Properties   5,265,596    133,957
Hudson Pacific Properties Inc.   6,934,801    104,299
Piedmont Office Realty Trust Inc. Class A   5,655,355     77,818
Easterly Government Properties Inc. Class A   3,753,923     76,092
Brandywine Realty Trust   7,852,004     73,416
Paramount Group Inc.   8,039,427     63,110
* Veris Residential Inc.   3,547,059     49,481
Office Properties Income Trust   2,223,013     46,194
Orion Office REIT Inc.   2,596,389     28,405
City Office REIT Inc.   1,998,229     28,175
Franklin Street Properties Corp.   4,764,019     18,056
*,2 New York REIT Liquidating LLC       1,208         14
                     3,975,151
Other (11.7%)3
4,5 Vanguard Real Estate II Index Fund 376,527,417  8,978,201
Residential REITs (13.3%)
AvalonBay Communities Inc.   6,410,351  1,371,430
Equity Residential  15,780,906  1,237,065
Invitation Homes Inc.  27,872,753  1,087,874
Mid-America Apartment Communities Inc.   5,290,637    982,630
Sun Communities Inc.   5,319,124    872,124
Essex Property Trust Inc.   2,994,301    857,957
UDR Inc.  14,598,581    706,571
Camden Property Trust   4,507,068    635,947
Equity LifeStyle Properties Inc.   8,102,334    595,684
          Shares Market
Value

($000)
American Homes 4 Rent Class A  13,300,847    503,836
American Campus Communities Inc.   6,457,763    421,821
Apartment Income REIT Corp. Class A   7,200,784    326,484
Independence Realty Trust Inc.  10,136,076    225,021
1 Washington REIT   4,009,715     88,895
NexPoint Residential Trust Inc.   1,054,907     70,193
Centerspace     689,948     59,260
* Apartment Investment & Management Co. Class A   6,986,166     58,125
UMH Properties Inc.   2,269,252     48,358
Bluerock Residential Growth REIT Inc. Class A   1,341,420     35,239
                    10,184,514
Retail REITs (9.9%)
Realty Income Corp.  27,123,565  2,006,873
Simon Property Group Inc.  14,672,055  1,593,972
Kimco Realty Corp.  28,285,568    625,394
Regency Centers Corp.   7,074,635    455,819
National Retail Properties Inc.   8,056,224    383,557
Federal Realty OP LP   3,245,463    342,753
Brixmor Property Group Inc.  13,661,702    316,678
Agree Realty Corp.   3,269,938    260,254
Spirit Realty Capital Inc.   5,859,542    259,812
Kite Realty Group Trust  10,042,773    199,751
1 Phillips Edison & Co. Inc.   5,201,736    177,067
SITE Centers Corp.   8,720,282    127,403
Macerich Co.   9,771,519    103,676
Retail Opportunity Investments Corp.   5,632,905     98,351
InvenTrust Properties Corp.   3,089,122     88,565
Urban Edge Properties   5,384,974     88,475
Tanger Factory Outlet Centers Inc.   4,776,117     77,707
Acadia Realty Trust   4,095,949     70,164
Getty Realty Corp.   1,821,938     53,456
Necessity Retail REIT Inc. Class A   5,959,018     46,421
RPT Realty   3,894,414     42,332
NETSTREIT Corp.   2,027,187     41,557
Saul Centers Inc.     653,078     34,143
Alexander's Inc.     105,398     25,665
Urstadt Biddle Properties Inc. Class A   1,368,442     25,179
1 CBL & Associates Properties Inc.     582,322     17,930
 
5

Real Estate Index Fund
          Shares Market
Value

($000)
Urstadt Biddle Properties Inc.      16,032        299
*,2 Spirit MTA REIT   2,071,263         —
                     7,563,253
Specialized REITs (33.0%)
American Tower Corp.  20,911,134  5,663,362
Crown Castle International Corp.  19,825,397  3,581,656
Equinix Inc.   4,161,311  2,928,481
Public Storage   7,229,976  2,359,936
SBA Communications Corp.   4,989,735  1,675,503
Digital Realty Trust Inc.  12,423,409  1,645,481
VICI Properties Inc.  38,751,120  1,324,901
Weyerhaeuser Co.  34,233,746  1,243,370
Extra Space Storage Inc.   6,141,538  1,163,944
Iron Mountain Inc.  13,294,309    644,641
Gaming & Leisure Properties Inc.  10,786,938    560,813
Life Storage Inc.   3,838,780    483,264
CubeSmart  10,274,900    471,310
Lamar Advertising Co. Class A   3,983,867    402,610
Rayonier Inc.   6,668,165    251,723
National Storage Affiliates Trust   3,974,179    217,944
EPR Properties   3,438,679    185,035
PotlatchDeltic Corp.   3,168,838    155,368
Uniti Group Inc.  10,828,607    107,961
Four Corners Property Trust Inc.   3,686,411    107,754
Outfront Media Inc.   5,701,780    105,255
Gladstone Land Corp.   1,489,480     40,380
Safehold Inc.     778,981     33,216
                    25,353,908
Total Equity Real Estate Investment Trusts (REITs) (Cost $61,679,101) 72,988,018
Real Estate Management & Development (4.2%)
Diversified Real Estate Activities (0.1%)
St. Joe Co.   1,485,517     62,422
RMR Group Inc. Class A     710,180     20,531
                        82,953
Real Estate Development (0.2%)
* Howard Hughes Corp.   1,896,475    134,441
* Forestar Group Inc.     908,355     12,572
                       147,013
Real Estate Operating Companies (0.4%)
* DigitalBridge Group Inc.  26,096,211    143,007
Kennedy-Wilson Holdings Inc.   5,691,636    117,589
*,1 WeWork Inc.   8,090,688     38,593
          Shares Market
Value

($000)
* FRP Holdings Inc.     281,101     16,585
*,1 Seritage Growth Properties Class A   1,208,337     14,524
                       330,298
Real Estate Services (3.5%)
* CBRE Group Inc. Class A  15,350,876  1,314,342
* Jones Lang LaSalle Inc.   2,288,175    436,286
* Zillow Group Inc. Class C   7,545,311    263,180
* Cushman & Wakefield plc   6,662,632    111,932
Newmark Group Inc. Class A   8,772,362    100,005
* Zillow Group Inc. Class A   2,828,387     98,994
*,1 Opendoor Technologies Inc.  18,585,684     91,256
* Anywhere Real Estate Inc.   5,348,291     53,109
Marcus & Millichap Inc.   1,184,121     48,454
1 eXp World Holdings Inc.   3,074,010     45,680
*,1 Compass Inc. Class A  10,313,029     39,396
* Redfin Corp.   4,032,926     35,086
RE/MAX Holdings Inc. Class A     861,455     21,829
Douglas Elliman Inc.   3,211,035     19,266
*,1 Offerpad Solutions Inc.   2,638,342      5,567
*,1 Doma Holdings Inc.   4,472,970      3,319
                     2,687,701
Total Real Estate Management & Development (Cost $4,119,341) 3,247,965
 
6

Real Estate Index Fund
          Shares Market
Value

($000)
Temporary Cash Investments (0.6%)
Money Market Fund (0.6%)
6,7 Vanguard Market Liquidity Fund, 1.903%
(Cost $482,230)
  4,824,316            482,239
Total Investments (100.0%)
(Cost $66,280,672)
  76,718,222
Other Assets and Liabilities—Net (0.0%)   (9,314)
Net Assets (100%)   76,708,908
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $84,190,000.
2 Security value determined using significant unobservable inputs.
3 “Other” represents securities that are not classified by the fund’s benchmark index.
4 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
5 Represents a wholly owned subsidiary of the fund. See accompanying financial statements for Vanguard Real Estate II Index Fund's Schedule of Investments.
6 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
7 Collateral of $88,289,000 was received for securities on loan, of which $84,183,000 is held in Vanguard Market Liquidity Fund and $4,106,000 is held in cash.
  REIT—Real Estate Investment Trust.
7

Real Estate Index Fund

Derivative Financial Instruments Outstanding as of Period End

Over-the-Counter Total Return Swaps
Reference Entity Termination
Date
Counterparty Notional
Amount
($000)
Floating
Interest
Rate
Received
(Paid)1
(%)
Value and
Unrealized
Appreciation
($000)
Value and
Unrealized
(Depreciation)
($000)
American Homes 4 Rent Class A 8/31/22 BANA 37,212 (1.809) 2,511
Digital Realty Trust Inc. 1/31/23 GSI 30,245 (2.153) 2,853
Digital Realty Trust Inc. 8/31/22 BANA 48,687 (1.797) 915
Equity Residential 8/31/22 BANA 14,444 (1.836) 1,339
Equity Residential 8/31/22 BANA 28,888 (1.813) 2,678
Redfin Corp. 1/31/23 GSI 3,059 (2.144) (15)
Seritage Growth Properties Class A 1/31/23 GSI 4,312 (2.129) 446
Simon Property Group Inc. 1/31/23 GSI 38,544 (2.165) 4,894
VICI Properties Inc. 8/31/22 BANA 160,866 (2.234) 25,436
Welltower Inc. 8/31/22 BANA 61,764 (1.804) 2,910
          43,982 (15)
1 Based on USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly.
  BANA—Bank of America, N.A.
  GSI—Goldman Sachs International.
At July 31, 2022, the counterparties had deposited in segregated accounts securities with a value of $17,357,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
8

Real Estate Index Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $58,590,407) 67,257,782
Affiliated Issuers (Cost $482,230) 482,239
Vanguard Real Estate II Index Fund (Cost $7,208,035) 8,978,201
Total Investments in Securities 76,718,222
Investment in Vanguard 2,409
Cash 4,106
Receivables for Investment Securities Sold 20,197
Receivables for Accrued Income 128,280
Receivables for Capital Shares Issued 18,678
Unrealized Appreciation—Over-the-Counter Swap Contracts 43,982
Total Assets 76,935,874
Liabilities  
Due to Custodian 9,652
Payables for Investment Securities Purchased 102,763
Collateral for Securities on Loan 88,289
Payables for Capital Shares Redeemed 22,634
Payables to Vanguard 3,613
Unrealized Depreciation—Over-the-Counter Swap Contracts 15
Total Liabilities 226,966
Net Assets 76,708,908
1 Includes $84,190 of securities on loan.  
9

Real Estate Index Fund
Statement of Assets and Liabilities (continued)


At July 31, 2022, net assets consisted of:

($000s, except shares and per-share amounts) Amount
Paid-in Capital 66,875,970
Total Distributable Earnings (Loss) 9,832,938
Net Assets 76,708,908
 
Investor Shares—Net Assets  
Applicable to 4,475,070 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
147,117
Net Asset Value Per Share—Investor Shares $32.87
 
ETF Shares—Net Assets  
Applicable to 413,914,080 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
40,954,284
Net Asset Value Per Share—ETF Shares $98.94
 
Admiral Shares—Net Assets  
Applicable to 170,284,766 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
23,878,936
Net Asset Value Per Share—Admiral Shares $140.23
 
Institutional Shares—Net Assets  
Applicable to 540,393,314 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
11,728,571
Net Asset Value Per Share—Institutional Shares $21.70
See accompanying Notes, which are an integral part of the Financial Statements.
10

Real Estate Index Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends—Unaffiliated Issuers 1,063,139
Dividends—Affiliated Issuers 30,576
Dividends—Vanguard Real Estate II Index Fund 117,477
Interest—Affiliated Issuers 645
Securities Lending—Net 660
Total Income 1,212,497
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 887
Management and Administrative—Investor Shares 213
Management and Administrative—ETF Shares 22,748
Management and Administrative—Admiral Shares 12,902
Management and Administrative—Institutional Shares 5,143
Marketing and Distribution—Investor Shares 6
Marketing and Distribution—ETF Shares 722
Marketing and Distribution—Admiral Shares 459
Marketing and Distribution—Institutional Shares 186
Custodian Fees 98
Shareholders’ Reports—Investor Shares 1
Shareholders’ Reports—ETF Shares 675
Shareholders’ Reports—Admiral Shares 173
Shareholders’ Reports—Institutional Shares 64
Trustees’ Fees and Expenses 20
Other Expenses 6
Total Expenses 44,303
Expenses Paid Indirectly (23)
Net Expenses 44,280
Net Investment Income 1,168,217
Realized Net Gain (Loss)  
Capital Gain Distributions Received—Unaffiliated Issuers 45,697
Capital Gain Distributions Received—Vanguard Real Estate II Index Fund
Investment Securities Sold—Unaffiliated Issuers1 1,688,874
Investment Securities Sold—Affiliated Issuers2 21,399
Investment Securities Sold—Vanguard Real Estate II Index Fund
Swap Contracts (39,546)
Realized Net Gain (Loss) 1,716,424
11

Real Estate Index Fund
Statement of Operations (continued)
  Six Months Ended
July 31, 2022
  ($000)
Change in Unrealized Appreciation (Depreciation)  
Investment Securities—Unaffiliated Issuers (7,655,293)
Investment Securities—Affiliated Issuers 204,832
Investment Securities—Vanguard Real Estate II Index Fund (683,638)
Swap Contracts 43,967
Change in Unrealized Appreciation (Depreciation) (8,090,132)
Net Increase (Decrease) in Net Assets Resulting from Operations (5,205,491)
1 Includes $1,805,234,000 of net gain (loss) resulting from in-kind redemptions.
2 Includes $32,314,000 of net gain (loss) resulting from in-kind redemptions.
See accompanying Notes, which are an integral part of the Financial Statements.
12

Real Estate Index Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 1,168,217   1,487,532
Realized Net Gain (Loss) 1,716,424   2,507,302
Change in Unrealized Appreciation (Depreciation) (8,090,132)   14,077,791
Net Increase (Decrease) in Net Assets Resulting from Operations (5,205,491)   18,072,625
Distributions      
Investor Shares (1,879)   (3,637)
ETF Shares (490,481)   (811,715)
Admiral Shares (276,428)   (463,925)
Institutional Shares (135,640)   (220,900)
Return of Capital      
Investor Shares   (1,874)
ETF Shares   (418,428)
Admiral Shares   (239,147)
Institutional Shares   (113,871)
Total Distributions (904,428)   (2,273,497)
Capital Share Transactions      
Investor Shares (33,562)   (35,113)
ETF Shares (2,289,715)   6,252,486
Admiral Shares (70,519)   1,052,588
Institutional Shares 490,722   221,639
Net Increase (Decrease) from Capital Share Transactions (1,903,074)   7,491,600
Total Increase (Decrease) (8,012,993)   23,290,728
Net Assets      
Beginning of Period 84,721,901   61,431,173
End of Period 76,708,908   84,721,901
See accompanying Notes, which are an integral part of the Financial Statements.
13

Real Estate Index Fund
Financial Highlights
Investor Shares            
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $35.37 $28.23 $31.21 $27.69 $26.40 $27.38
Investment Operations            
Net Investment Income1 .459 .602 .586 .719 .787 .761
Net Realized and Unrealized Gain (Loss) on Investments (2.600) 7.475 (2.498) 3.801 1.639 (.614)
Total from Investment Operations (2.141) 8.077 (1.912) 4.520 2.426 .147
Distributions            
Dividends from Net Investment Income (.359) (.620) (.624) (.752) (.851) (.788)
Distributions from Realized Capital Gains (.011)
Return of Capital (.317) (.444) (.248) (.285) (.328)
Total Distributions (.359) (.937) (1.068) (1.000) (1.136) (1.127)
Net Asset Value, End of Period $32.87 $35.37 $28.23 $31.21 $27.69 $26.40
Total Return2 -6.03% 28.73% -5.88% 16.59% 9.53% 0.45%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $147 $196 $188 $243 $1,871 $2,143
Ratio of Total Expenses to Average Net Assets 0.25% 3 0.26% 0.26% 0.26% 0.25% 0.26%
Ratio of Net Investment Income to Average Net Assets 2.58% 1.77% 2.18% 2.48% 3.02% 2.87%
Portfolio Turnover Rate4 4% 7% 8% 6% 24% 6%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.25%.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
14

Real Estate Index Fund
Financial Highlights
ETF Shares            
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $106.44 $84.96 $93.93 $83.36 $79.47 $82.43
Investment Operations            
Net Investment Income1 1.470 1.960 1.889 2.335 2.487 2.499
Net Realized and Unrealized Gain (Loss) on Investments (7.824) 22.486 (7.525) 11.379 4.934 (1.945)
Total from Investment Operations (6.354) 24.446 (5.636) 13.714 7.421 .554
Distributions            
Dividends from Net Investment Income (1.146) (1.943) (1.947) (2.364) (2.646) (2.458)
Distributions from Realized Capital Gains (.034)
Return of Capital (1.023) (1.387) (.780) (.885) (1.022)
Total Distributions (1.146) (2.966) (3.334) (3.144) (3.531) (3.514)
Net Asset Value, End of Period $98.94 $106.44 $84.96 $93.93 $83.36 $79.47
Total Return -5.95% 28.88% -5.80% 16.70% 9.70% 0.59%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $40,954 $46,673 $32,064 $37,682 $30,857 $32,377
Ratio of Total Expenses to Average Net Assets 0.12% 2 0.12% 0.12% 0.12% 0.12% 0.12%
Ratio of Net Investment Income to Average Net Assets 2.76% 1.90% 2.33% 2.60% 3.15% 3.01%
Portfolio Turnover Rate3 4% 7% 8% 6% 24% 6%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.12%.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
15

Real Estate Index Fund
Financial Highlights
Admiral Shares            
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $150.85 $120.40 $133.12 $118.14 $112.63 $116.83
Investment Operations            
Net Investment Income1 2.096 2.761 2.677 3.315 3.507 3.538
Net Realized and Unrealized Gain (Loss) on Investments (11.091) 31.890 (10.672) 16.121 7.008 (2.761)
Total from Investment Operations (8.995) 34.651 (7.995) 19.436 10.515 .777
Distributions            
Dividends from Net Investment Income (1.625) (2.770) (2.759) (3.350) (3.751) (3.483)
Distributions from Realized Capital Gains (.048)
Return of Capital (1.431) (1.966) (1.106) (1.254) (1.447)
Total Distributions (1.625) (4.201) (4.725) (4.456) (5.005) (4.978)
Net Asset Value, End of Period $140.23 $150.85 $120.40 $133.12 $118.14 $112.63
Total Return2 -5.94% 28.91% -5.74% 16.73% 9.69% 0.58%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $23,879 $25,764 $19,702 $23,274 $18,223 $17,757
Ratio of Total Expenses to Average Net Assets 0.12% 3 0.12% 0.12% 0.12% 0.11% 0.12%
Ratio of Net Investment Income to Average Net Assets 2.78% 1.90% 2.33% 2.60% 3.16% 3.01%
Portfolio Turnover Rate4 4% 7% 8% 6% 24% 6%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.12%.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
16

Real Estate Index Fund
Financial Highlights
Institutional Shares            
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $23.35 $18.64 $20.60 $18.28 $17.43 $18.08
Investment Operations            
Net Investment Income1 .328 .432 .421 .518 .543 .568
Net Realized and Unrealized Gain (Loss) on Investments (1.724) 4.933 (1.646) 2.496 1.085 (.444)
Total from Investment Operations (1.396) 5.365 (1.225) 3.014 1.628 .124
Distributions            
Dividends from Net Investment Income (.254) (.432) (.429) (.522) (.583) (.542)
Distributions from Realized Capital Gains (.007)
Return of Capital (.223) (.306) (.172) (.195) (.225)
Total Distributions (.254) (.655) (.735) (.694) (.778) (.774)
Net Asset Value, End of Period $21.70 $23.35 $18.64 $20.60 $18.28 $17.43
Total Return -5.95% 28.91% -5.68% 16.77% 9.70% 0.60%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $11,729 $12,089 $9,478 $10,027 $8,206 $8,176
Ratio of Total Expenses to Average Net Assets 0.10% 2 0.10% 0.10% 0.10% 0.09% 0.10%
Ratio of Net Investment Income to Average Net Assets 2.81% 1.92% 2.37% 2.63% 3.18% 3.03%
Portfolio Turnover Rate3 4% 7% 8% 6% 24% 6%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.10%.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
See accompanying Notes, which are an integral part of the Financial Statements.
17

Real Estate Index Fund
Notes to Financial Statements
Vanguard Real Estate Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, ETF Shares, Admiral Shares, and Institutional Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker.
As a part of its principal investment strategy, the fund attempts to replicate its benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through a wholly owned subsidiary—in the stocks that make up the index. Vanguard Real Estate II Index Fund is the wholly owned subsidiary in which the fund has invested a portion of its assets. For additional financial information about the Real Estate II Index Fund, refer to the accompanying financial statements.
Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in affiliated Vanguard funds are valued at that fund's net asset value.
2. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their
18

Real Estate Index Fund
performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund's net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
The notional amounts of swap contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap, at which time realized gain (loss) is recorded.
During the six months ended July 31, 2022, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings.
19

Real Estate Index Fund
While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions received from investment securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Income, capital gain, and return of capital distributions received from affiliated Vanguard funds are recorded on ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
20

Real Estate Index Fund
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $2,409,000, representing less than 0.01% of the fund’s net assets and 0.96% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, custodian fee offset arrangements reduced the fund’s expenses by $23,000 (an annual rate of less than 0.01% of average net assets).
D. Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
21

Real Estate Index Fund
The following table summarizes the market value of the fund's investments and derivatives as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks 76,235,969 14 76,235,983
Temporary Cash Investments 482,239 482,239
Total 76,718,208 14 76,718,222
Derivative Financial Instruments        
Assets        
Swap Contracts 43,982 43,982
Liabilities        
Swap Contracts 15 15
E. As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 66,532,469
Gross Unrealized Appreciation 16,444,842
Gross Unrealized Depreciation (6,215,122)
Net Unrealized Appreciation (Depreciation) 10,229,720
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,552,105,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
F. During the six months ended July 31, 2022, the fund purchased $6,666,599,000 of investment securities and sold $8,517,790,000 of investment securities, other than temporary cash investments. Purchases and sales include $2,716,008,000 and $5,022,320,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
The fund purchased securities from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such purchases were $11,282,000 and sales were $2,771,000, resulting in net realized loss of $235,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
22

Real Estate Index Fund
G. Capital share transactions for each class of shares were:
    
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 8,183 239   40,853 1,192
Issued in Lieu of Cash Distributions 1,879 58   5,511 161
Redeemed (43,624) (1,361)   (81,477) (2,463)
Net Increase (Decrease)—Investor Shares (33,562) (1,064)   (35,113) (1,110)
ETF Shares          
Issued 2,739,304 26,810   12,323,320 119,786
Issued in Lieu of Cash Distributions  
Redeemed (5,029,019) (51,400)   (6,070,834) (58,700)
Net Increase (Decrease)—ETF Shares (2,289,715) (24,590)   6,252,486 61,086
Admiral Shares          
Issued 1,491,343 10,427   4,265,102 29,377
Issued in Lieu of Cash Distributions 242,660 1,768   616,726 4,188
Redeemed (1,804,522) (12,701)   (3,829,240) (26,405)
Net Increase (Decrease)—Admiral Shares (70,519) (506)   1,052,588 7,160
Institutional Shares          
Issued 1,257,128 57,103   2,230,405 98,845
Issued in Lieu of Cash Distributions 125,971 5,933   311,998 13,695
Redeemed (892,377) (40,438)   (2,320,764) (103,325)
Net Increase (Decrease)—Institutional Shares 490,722 22,598   221,639 9,215
23

Real Estate Index Fund
H.Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:
    Current Period Transactions  
  Jan. 31, 2022
Market Value
($000)
Purchases
at Cost
($000)
Proceeds
from
Securities
Sold1
($000)
Realized
Net Gain
(Loss)
($000)
Change in
Unrealized
App. (Dep.)
($000)
Income
($000)
Capital Gain
Distributions
Received
($000)
Jul. 31, 2022
Market Value
($000)
Easterly Government Properties Inc. 90,343 5,544 16,623 (251) (2,921) 2,164 NA 2
Equity Commonwealth NA 3 10,687 27,803 (1,498) 12,511 NA 2
Hudson Pacific Properties Inc. NA 3 11,338 17,834 (4,079) (57,207) 3,572 NA 2
Vanguard Market Liquidity Fund 147,613 NA 4 NA 4 (50) (14) 645 482,239
Vanguard Real Estate II Index Fund 9,542,041 117,477 (683,638) 117,477 8,978,201
VICI Properties Inc. NA 3,5 488,161 282,110 27,277 252,463 24,840 NA 2
Total 9,779,997 633,207 344,370 21,399 (478,806) 148,698 9,460,440
1 Does not include adjustments related to return of capital.
2 Not applicable—at July 31, 2022, the security was still held, but the issuer was no longer an affiliated company of the fund.
3 Not applicable—at January 31, 2022, the issuer was not an affiliated company of the fund.
4 Not applicable—purchases and sales are for temporary cash investment purposes.
5 Not applicable—in April 2022, VICI Properties Inc. acquired MGM Growth Properties LLC.
I. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
24

Real Estate II Index Fund
Fund Allocation
As of July 31, 2022
Diversified Real Estate Activities 0.1%
Diversified REITs 2.7
Health Care REITs 8.1
Hotel & Resort REITs 2.5
Industrial REITs 11.6
Office REITs 5.9
Real Estate Development 0.2
Real Estate Operating Companies 0.5
Real Estate Services 4.0
Residential REITs 15.2
Retail REITs 11.3
Specialized REITs 37.9
The table reflects the fund’s investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
25

Real Estate II Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
          Shares Market
Value

($000)
Equity Real Estate Investment Trusts (REITs) (95.0%)
Diversified REITs (2.7%)
WP Carey Inc. 1,158,931   103,493
STORE Capital Corp. 1,498,233    43,479
Broadstone Net Lease Inc.   993,672    22,527
Essential Properties Realty Trust Inc.   763,637    18,419
Global Net Lease Inc.   631,098     9,523
American Assets Trust Inc.   312,892     9,459
Alexander & Baldwin Inc.   440,954     8,779
Empire State Realty Trust Inc. Class A   874,766     7,462
iStar Inc.   420,079     7,019
Armada Hoffler Properties Inc.   409,794     5,811
Gladstone Commercial Corp.   229,328     4,804
One Liberty Properties Inc.   101,863     2,827
                    243,602
Health Care REITs (8.1%)
Welltower Inc. 2,719,606   234,811
Ventas Inc. 2,429,055   130,635
Healthpeak Properties Inc. 3,279,150    90,603
Medical Properties Trust Inc. 3,628,739    62,559
Healthcare Realty Trust Inc. Class A 2,314,798    60,763
Omega Healthcare Investors Inc. 1,453,889    45,071
Physicians Realty Trust 1,367,537    24,301
Sabra Health Care REIT Inc. 1,403,911    21,606
National Health Investors Inc.   278,772    18,076
CareTrust REIT Inc.   590,124    12,186
LTC Properties Inc.   240,295    10,068
Community Healthcare Trust Inc.   144,816     5,641
Global Medical REIT Inc.   371,042     4,519
          Shares Market
Value

($000)
Universal Health Realty Income Trust    79,609     4,291
Diversified Healthcare Trust 1,449,979     2,508
                    727,638
Hotel & Resort REITs (2.5%)
Host Hotels & Resorts Inc. 4,342,314    77,337
* Ryman Hospitality Properties Inc.   318,097    28,164
Apple Hospitality REIT Inc. 1,318,391    21,991
Park Hotels & Resorts Inc. 1,037,833    16,180
Pebblebrook Hotel Trust   799,484    15,638
* Sunstone Hotel Investors Inc. 1,333,564    15,109
RLJ Lodging Trust 1,012,853    12,650
* DiamondRock Hospitality Co. 1,281,877    11,896
* Xenia Hotels & Resorts Inc.   694,712    11,407
Service Properties Trust 1,004,752     6,571
* Summit Hotel Properties Inc.   647,605     5,084
* Chatham Lodging Trust   280,859     3,415
                    225,442
Industrial REITs (11.6%)
Prologis Inc. 4,499,479   596,451
Duke Realty Corp. 2,327,380   145,601
Rexford Industrial Realty Inc.   976,154    63,850
Americold Realty Trust Inc. 1,381,262    45,236
EastGroup Properties Inc.   250,819    42,775
First Industrial Realty Trust Inc.   801,263    41,625
STAG Industrial Inc. 1,082,003    35,468
Terreno Realty Corp.   459,057    28,760
LXP Industrial Trust 1,736,639    19,051
Innovative Industrial Properties Inc.   155,821    15,023
Plymouth Industrial REIT Inc.   222,529     4,286
Industrial Logistics Properties Trust   398,082     3,993
                  1,042,119
26

Real Estate II Index Fund
          Shares Market
Value

($000)
Office REITs (5.9%)
Alexandria Real Estate Equities Inc.   923,884   153,161
Boston Properties Inc.   905,004    82,500
Kilroy Realty Corp.   638,690    34,604
Vornado Realty Trust   990,820    30,111
Cousins Properties Inc.   903,950    27,887
Douglas Emmett Inc. 1,068,361    25,256
Highwoods Properties Inc.   637,664    22,682
SL Green Realty Corp.   393,738    19,549
* Equity Commonwealth   687,473    19,284
Corporate Office Properties Trust   682,859    19,222
JBG SMITH Properties   697,898    17,755
Hudson Pacific Properties Inc.   919,272    13,826
Piedmont Office Realty Trust Inc. Class A   749,588    10,314
Easterly Government Properties Inc. Class A   497,600    10,086
Brandywine Realty Trust 1,040,730     9,731
Paramount Group Inc. 1,066,693     8,374
* Veris Residential Inc.   470,485     6,563
Office Properties Income Trust   294,714     6,124
Orion Office REIT Inc.   343,992     3,763
City Office REIT Inc.   264,882     3,735
Franklin Street Properties Corp.   633,398     2,401
                    526,928
Residential REITs (15.2%)
AvalonBay Communities Inc.   849,741   181,794
Equity Residential 2,171,420   170,218
Invitation Homes Inc. 3,694,748   144,206
Mid-America Apartment Communities Inc.   701,313   130,255
Sun Communities Inc.   705,091   115,607
Essex Property Trust Inc.   396,917   113,729
UDR Inc. 1,935,170    93,662
Camden Property Trust   597,449    84,300
Equity LifeStyle Properties Inc. 1,074,046    78,964
American Homes 4 Rent Class A 1,902,291    72,059
American Campus Communities Inc.   855,959    55,911
Apartment Income REIT Corp. Class A   954,478    43,276
Independence Realty Trust Inc. 1,343,606    29,828
Washington REIT   531,381    11,781
NexPoint Residential Trust Inc.   139,744     9,298
Centerspace    91,356     7,846
* Apartment Investment & Management Co. Class A   926,197     7,706
          Shares Market
Value

($000)
UMH Properties Inc.   300,645     6,407
Bluerock Residential Growth REIT Inc. Class A   177,745     4,669
                  1,361,516
Retail REITs (11.2%)
Realty Income Corp. 3,595,410   266,024
Simon Property Group Inc. 1,997,923   217,054
Kimco Realty Corp. 3,749,466    82,901
Regency Centers Corp.   937,819    60,424
National Retail Properties Inc. 1,067,872    50,841
Federal Realty OP LP   430,218    45,435
Brixmor Property Group Inc. 1,810,950    41,978
Agree Realty Corp.   433,430    34,497
Spirit Realty Capital Inc.   776,693    34,439
Kite Realty Group Trust 1,331,222    26,478
1 Phillips Edison & Co. Inc.   689,529    23,472
SITE Centers Corp. 1,155,888    16,887
Macerich Co. 1,295,245    13,743
Retail Opportunity Investments Corp.   746,485    13,034
InvenTrust Properties Corp.   409,468    11,739
Urban Edge Properties   714,031    11,732
Tanger Factory Outlet Centers Inc.   633,048    10,300
Acadia Realty Trust   543,264     9,306
Getty Realty Corp.   241,693     7,091
Necessity Retail REIT Inc. Class A   789,954     6,154
RPT Realty   514,604     5,594
NETSTREIT Corp.   269,457     5,524
Saul Centers Inc.    86,333     4,513
Alexander's Inc.    13,988     3,406
Urstadt Biddle Properties Inc. Class A   183,284     3,372
1 CBL & Associates Properties Inc.    77,067     2,373
*,2 Spirit MTA REIT   257,871        —
                  1,008,311
Specialized REITs (37.8%)
American Tower Corp. 2,771,941   750,725
Crown Castle International Corp. 2,628,026   474,779
Equinix Inc.   551,619   388,196
Public Storage   958,397   312,830
Digital Realty Trust Inc. 1,729,681   229,096
SBA Communications Corp.   661,432   222,102
VICI Properties Inc. 5,852,569   200,099
Weyerhaeuser Co. 4,537,971   164,819
Extra Space Storage Inc.   814,116   154,291
Iron Mountain Inc. 1,762,257    85,452
Gaming & Leisure Properties Inc. 1,429,876    74,339
Life Storage Inc.   508,870    64,062
 
27

Real Estate II Index Fund
          Shares Market
Value

($000)
CubeSmart 1,362,038    62,477
Lamar Advertising Co. Class A   528,094    53,369
Rayonier Inc.   883,921    33,368
National Storage Affiliates Trust   526,821    28,891
EPR Properties   455,790    24,526
PotlatchDeltic Corp.   420,033    20,594
Uniti Group Inc. 1,435,498    14,312
Four Corners Property Trust Inc.   488,552    14,281
Outfront Media Inc.   755,826    13,953
Gladstone Land Corp.   198,008     5,368
Safehold Inc.   103,439     4,411
                  3,396,340
Total Equity Real Estate Investment Trusts (REITs) (Cost $6,717,716) 8,531,896
Real Estate Management & Development (4.8%)
Diversified Real Estate Activities (0.1%)
St. Joe Co.   196,789     8,269
RMR Group Inc. Class A    94,242     2,724
                     10,993
Real Estate Development (0.2%)
* Howard Hughes Corp.   251,409    17,822
* Forestar Group Inc.   120,847     1,673
                     19,495
Real Estate Operating Companies (0.5%)
* DigitalBridge Group Inc. 3,459,676    18,959
Kennedy-Wilson Holdings Inc.   754,484    15,588
*,1 WeWork Inc. 1,071,100     5,109
* Seritage Growth Properties Class A   213,098     2,561
* FRP Holdings Inc.    37,335     2,203
                     44,420
Real Estate Services (4.0%)
* CBRE Group Inc. Class A 2,034,952   174,233
* Jones Lang LaSalle Inc.   303,333    57,837
* Zillow Group Inc. Class C   996,489    34,758
* Cushman & Wakefield plc   883,283    14,839
          Shares Market
Value

($000)
Newmark Group Inc. Class A 1,162,909    13,257
* Zillow Group Inc. Class A   378,600    13,251
* Opendoor Technologies Inc. 2,463,977    12,098
* Anywhere Real Estate Inc.   709,473     7,045
Marcus & Millichap Inc.   156,652     6,410
1 eXp World Holdings Inc.   406,749     6,044
* Compass Inc. Class A 1,366,823     5,221
* Redfin Corp.   581,335     5,058
RE/MAX Holdings Inc. Class A   114,441     2,900
Douglas Elliman Inc.   424,547     2,547
*,1 Offerpad Solutions Inc.   348,555       735
*,1 Doma Holdings Inc.   581,481       432
                    356,665
Total Real Estate Management & Development (Cost $511,284) 431,573
Temporary Cash Investments (0.3%)
Money Market Fund (0.3%)
3,4 Vanguard Market Liquidity Fund, 1.903%
(Cost $26,840)
  268,507           26,840
Total Investments (100.1%)
(Cost $7,255,840)
  8,990,309
Other Assets and Liabilities—Net (-0.1%)   (12,108)
Net Assets (100%)   8,978,201
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $13,847,000.
2 Security value determined using significant unobservable inputs.
3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
4 Collateral of $14,336,000 was received for securities on loan.
  REIT—Real Estate Investment Trust.
 
28

Real Estate II Index Fund

Derivative Financial Instruments Outstanding as of Period End

Over-the-Counter Total Return Swaps
Reference Entity Termination
Date
Counterparty Notional
Amount
($000)
Floating
Interest
Rate
Received
(Paid)1
(%)
Value and
Unrealized
Appreciation
($000)
Value and
Unrealized
(Depreciation)
($000)
Americold Realty Trust Inc. 1/31/23 GSI 7,788 (2.093) 396
Park Hotels & Resorts Inc. 1/31/23 GSI 5,544 (2.110) 690
          1,086
1 Based on USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly.
  GSI—Goldman Sachs International.
At July 31, 2022, the counterparties had deposited in segregated accounts securities with a value of $1,092,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
29

Real Estate II Index Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $7,229,000) 8,963,469
Affiliated Issuers (Cost $26,840) 26,840
Total Investments in Securities 8,990,309
Investment in Vanguard 316
Receivables for Investment Securities Sold 1,218
Receivables for Accrued Income 16,915
Unrealized Appreciation—Over-the-Counter Swap Contracts 1,086
Total Assets 9,009,844
Liabilities  
Due to Custodian 1,218
Payables for Investment Securities Purchased 15,788
Collateral for Securities on Loan 14,336
Payables to Vanguard 301
Total Liabilities 31,643
Net Assets 8,978,201
1 Includes $13,847 of securities on loan.  

At July 31, 2022, net assets consisted of:

   
Paid-in Capital 7,206,235
Total Distributable Earnings (Loss) 1,771,966
Net Assets 8,978,201
   
Net Assets  
Applicable to 376,527,417 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
8,978,201
Net Asset Value Per Share $23.84
See accompanying Notes, which are an integral part of the Financial Statements.
30

Real Estate II Index Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends 142,749
Interest 1 17
Securities Lending—Net 70
Total Income 142,836
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 618
Management and Administrative 2,872
Marketing and Distribution 79
Custodian Fees 13
Shareholders’ Reports
Trustees’ Fees and Expenses 2
Other Expenses 6
Total Expenses 3,590
Expenses Paid Indirectly (1)
Net Expenses 3,589
Net Investment Income 139,247
Realized Net Gain (Loss)  
Capital Gain Distributions Received 5,521
Investment Securities Sold1 14,480
Swap Contracts (1,523)
Realized Net Gain (Loss) 18,478
Change in Unrealized Appreciation (Depreciation)  
Investment Securities1 (722,651)
Swap Contracts 1,086
Change in Unrealized Appreciation (Depreciation) (721,565)
Net Increase (Decrease) in Net Assets Resulting from Operations (563,840)
1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $17,000, ($6,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
31

Real Estate II Index Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 139,247   176,897
Realized Net Gain (Loss) 18,478   53,384
Change in Unrealized Appreciation (Depreciation) (721,565)   1,912,230
Net Increase (Decrease) in Net Assets Resulting from Operations (563,840)   2,142,511
Distributions      
Net Investment Income and/or Realized Capital Gains (117,477)   (186,333)
Return of Capital   (76,790)
Total Distributions (117,477)   (263,123)
Capital Share Transactions      
Issued  
Issued in Lieu of Cash Distributions 117,477   263,123
Redeemed  
Net Increase (Decrease) from Capital Share Transactions 117,477   263,123
Total Increase (Decrease) (563,840)   2,142,511
Net Assets      
Beginning of Period 9,542,041   7,399,530
End of Period 8,978,201   9,542,041
See accompanying Notes, which are an integral part of the Financial Statements.
32

Real Estate II Index Fund
Financial Highlights
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31, September 26,
20171 to
January 31,
2018
2022 2021 2020 2019  
Net Asset Value, Beginning of Period $25.69 $20.50 $22.64 $20.10 $19.17 $20.00
Investment Operations            
Net Investment Income2 .373 .484 .471 .571 .611 .268
Net Realized and Unrealized Gain (Loss) on Investments (1.908) 5.427 (1.808) 2.752 1.176 (.834)
Total from Investment Operations (1.535) 5.911 (1.337) 3.323 1.787 (.566)
Distributions            
Dividends from Net Investment Income (.315) (.477) (.465) (.590) (.626) (.225)
Distributions from Realized Capital Gains (.034) (.030)
Return of Capital (.210) (.338) (.193) (.231) (.009)
Total Distributions (.315) (.721) (.803) (.783) (.857) (.264)
Net Asset Value, End of Period $23.84 $25.69 $20.50 $22.64 $20.10 $19.17
Total Return -5.93% 28.96% -5.70% 16.78% 9.68% -2.89%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $8,978 $9,542 $7,400 $7,848 $6,719 $6,126
Ratio of Total Expenses to Average Net Assets 0.08% 3 0.08% 0.08% 0.08% 0.08% 0.08% 4
Ratio of Net Investment Income to Average Net Assets 2.90% 1.95% 2.41% 2.63% 3.22% 3.84% 4
Portfolio Turnover Rate 3% 6% 4% 3% 23% 1%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Inception.
2 Calculated based on average shares outstanding.
3 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.08%.
4 Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
33

Real Estate II Index Fund
Notes to Financial Statements
Vanguard Real Estate II Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund is a wholly owned subsidiary of Vanguard Real Estate Index Fund (“Real Estate Index Fund”), and at July 31, 2022, the Real Estate Index Fund was the record and beneficial owner of 100% of the fund’s net assets. As part of the Real Estate Index Fund’s principal investment strategy, it attempts to replicate the benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through the fund—in the stocks that make up the index.
Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
2. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting
34

Real Estate II Index Fund
arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund's net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
The notional amounts of swap contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap, at which time realized gain (loss) is recorded.
During the six months ended July 31, 2022, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceed a fund's current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities
35

Real Estate II Index Fund
lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
7. Other: Distributions received from investment securities are recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Each investment security reports annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. 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.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
36

Real Estate II Index Fund
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $316,000, representing less than 0.01% of the fund’s net assets and 0.13% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, custodian fee offset arrangements reduced the fund’s expenses by $1,000 (an annual rate of less than 0.01% of average net assets).
D. Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund's investments and derivatives as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks 8,963,469 8,963,469
Temporary Cash Investments 26,840 26,840
Total 8,990,309 8,990,309
Derivative Financial Instruments        
Assets        
Swap Contracts 1,086 1,086
E. As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 7,288,336
Gross Unrealized Appreciation 2,502,589
Gross Unrealized Depreciation (799,530)
Net Unrealized Appreciation (Depreciation) 1,703,059
37

Real Estate II Index Fund
F. During the six months ended July 31, 2022, the fund purchased $461,971,000 of investment securities and sold $306,012,000 of investment securities, other than temporary cash investments.
The fund purchased securities from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such purchases were $1,390,000 and sales were $140,000, resulting in net realized loss of $19,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
G. Capital shares issued and redeemed were:
    
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Shares
(000)
  Shares
(000)
Issued  
Issued in Lieu of Cash Distributions 5,076   10,506
Redeemed  
Net Increase (Decrease) in Shares Outstanding 5,076   10,506
H. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
38

Trustees Approve Advisory Arrangements
The board of trustees of Vanguard Real Estate Index Fund and the board of trustees of Vanguard Real Estate II Index Fund have renewed their respective fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. Each board determined that continuing the respective fund’s internalized management structure was in the best interests of the fund and its shareholders.
Each board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
Each board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, each board received periodic reports throughout the year, which included information about the respective fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the advisor.
Prior to their meeting, the trustees of each board were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether either board approved its respective fund’s arrangement. Rather, it was the totality of the circumstances that drove each board’s decision.
Nature, extent, and quality of services
The board of the Real Estate Index Fund reviewed the quality of that fund’s investment management services over both the short and long term, while the board of the Real Estate II Index Fund reviewed the quality of that fund’s investment management services since its inception in 2017; they each took into account the organizational depth and stability of the advisor. Each board considered that Vanguard has been managing investments for more than four decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
Each board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement with its respective fund.
Investment performance
The board of the Real Estate Index Fund considered the short- and long-term performance of that fund, including any periods of outperformance or underperformance compared with its target index and peer group, while the board of the Real Estate II Index Fund considered the short-term and since inception performance of that fund compared with its target index and peer group. Each board concluded that the performance of its respective fund was such that its advisory arrangement should continue.
39

Cost
Each board concluded that the respective fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the respective fund’s advisory expenses were also below the peer-group average.
Neither board conducts a profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of scale
Each board concluded that its respective fund’s arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
Each board will consider whether to renew its respective advisory arrangement again after a one-year period.
40

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Real Estate Index Funds approved the appointment of liquidity risk management program administrators responsible for administering the Program for Vanguard Real Estate Index Fund and Vanguard Real Estate II Index Fund, and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program's operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the funds' liquidity risk.
41

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Q1232 092022

 

 

Semiannual Report   |   July 31, 2022
Vanguard Dividend Growth Fund

 

Contents
About Your Fund’s Expenses

1
Financial Statements

4
Liquidity Risk Management

15

 

About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

 

Six Months Ended July 31, 2022      
Dividend Growth Fund Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return $1,000.00 $973.70 $1.47
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.31 1.51
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.30%. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

 

Dividend Growth Fund
Fund Allocation
As of July 31, 2022
Communication Services 1.5%
Consumer Discretionary 11.7
Consumer Staples 16.0
Financials 8.4
Health Care 18.5
Industrials 20.8
Information Technology 15.1
Materials 5.1
Real Estate 2.9
The table reflects the fund’s investments, except for short-term investments. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
3

 

Dividend Growth Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (97.9%)
Communication Services (1.5%)
  Comcast Corp. Class A 21,385,571    802,387
Consumer Discretionary (11.4%)
  TJX Cos. Inc. 33,263,850  2,034,417
  McDonald's Corp.  5,996,876  1,579,397
  NIKE Inc. Class B 13,146,679  1,510,816
  Home Depot Inc.  3,153,585    949,040
       6,073,670
Consumer Staples (15.6%)
  Colgate-Palmolive Co. 23,372,041  1,840,315
  PepsiCo Inc.  8,539,179  1,494,015
  Procter & Gamble Co. 10,138,846  1,408,387
  Coca-Cola Co. 20,650,771  1,325,160
  Costco Wholesale Corp.  2,191,388  1,186,198
  Diageo plc 21,972,876  1,040,896
       8,294,971
Financials (8.2%)
  Marsh & McLennan Cos. Inc.  8,807,118  1,444,015
  Chubb Ltd.  6,390,463  1,205,497
  American Express Co.  6,899,286  1,062,628
  PNC Financial Services Group Inc.  4,001,572    664,021
       4,376,161
Health Care (18.2%)
  UnitedHealth Group Inc.  3,967,182  2,151,561
  Stryker Corp.  6,905,037  1,482,857
  Johnson & Johnson  8,267,659  1,442,872
  Medtronic plc 12,684,304  1,173,552
  Danaher Corp.  3,938,156  1,147,854
  Baxter International Inc. 16,576,448    972,374
  Merck & Co. Inc.  7,847,792    701,122
  Pfizer Inc. 11,049,853    558,128
       9,630,320
Industrials (20.4%)
  Northrop Grumman Corp.  3,666,984  1,756,119
  Honeywell International Inc.  8,697,718  1,673,963
    Shares Market
Value

($000)
  Union Pacific Corp.  5,721,760  1,300,556
  Raytheon Technologies Corp. 13,730,740  1,279,842
  General Dynamics Corp.  5,570,714  1,262,714
  Canadian National Railway Co.  9,141,864  1,158,162
  United Parcel Service Inc. Class B  5,921,866  1,154,112
  Lockheed Martin Corp.  1,823,908    754,751
  Deere & Co.  1,417,859    486,581
      10,826,800
Information Technology (14.8%)
  Visa Inc. Class A  6,888,638  1,461,149
  Microsoft Corp.  5,182,310  1,454,882
  Mastercard Inc. Class A  3,732,371  1,320,476
  Texas Instruments Inc.  7,295,937  1,305,170
  Accenture plc Class A  4,223,497  1,293,488
  Automatic Data Processing Inc.  4,143,705    999,130
       7,834,295
Materials (5.0%)
  Linde plc  4,442,957  1,341,773
  Ecolab Inc.  7,904,944  1,305,660
       2,647,433
Real Estate (2.8%)
  Public Storage  2,390,232    780,196
  American Tower Corp.  2,645,787    716,558
       1,496,754
Total Common Stocks
(Cost $29,949,301)
51,982,791
Temporary Cash Investments (1.9%)
Money Market Fund (0.0%)
1 Vanguard Market Liquidity Fund, 1.903%         262         26
4

 

Dividend Growth Fund
    Face
Amount
($000)
Market
Value

($000)
Repurchase Agreements (1.0%)
  Credit Agricole Securities 2.220%, 8/1/22
(Dated 7/29/22, Repurchase Value $83,015,000, collateralized by U.S. Treasury Note/Bond 2.500%, 2/15/45, with a value of $84,660,000)
    83,000     83,000
  Natixis SA 2.220%, 8/1/22
(Dated 7/29/22, Repurchase Value $323,660,000, collateralized by Fannie Mae 0.000%, 8/6/38, Federal Home Loan Bank 2.840%–3.000%, 2/24/37–1/27/42, U.S. Treasury Inflation Indexed Note/Bond 0.125%, 10/15/25–7/15/30, and U.S. Treasury Note/Bond 0.125%–4.750%, 8/31/23–5/15/52, with a value of $330,072,000)
   323,600    323,600
  NatWest Markets plc 2.230%, 8/1/22
(Dated 7/29/22, Repurchase Value $26,505,000, collateralized by U.S. Treasury Note/Bond 2.250%, 12/31/24, with a value of $27,030,000)
    26,500     26,500
  Societe Generale 2.265%, 8/1/22
(Dated 7/29/22, Repurchase Value $89,317,000, collateralized by U.S. Treasury Inflation Indexed Note/Bond 2.461%, 4/30/24, with a value of $91,086,000)
    89,300     89,300
         522,400
    Face
Amount
($000)
Market
Value

($000)
U.S. Government and Agency Obligations (0.9%)
  United States Cash Management Bill, 1.106%–1.853%, 9/6/22     266,090    265,521
  United States Treasury Bill, 1.282%, 8/9/22     150,000    149,930
  United States Treasury Bill, 0.948%, 8/16/22      30,525     30,498
  United States Treasury Bill, 2.406%, 10/20/22      21,735     21,622
         467,571
Total Temporary Cash Investments (Cost $990,136) 989,997
Total Investments (99.8%) (Cost $30,939,437) 52,972,788
Other Assets and Liabilities—Net (0.2%) 91,014
Net Assets (100%) 53,063,802
Cost is in $000.
See Note A in Notes to Financial Statements.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
 
See accompanying Notes, which are an integral part of the Financial Statements.
5

 

Dividend Growth Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers (Cost $30,939,411) 52,972,762
Affiliated Issuers (Cost $26) 26
Total Investments in Securities 52,972,788
Investment in Vanguard 1,931
Cash 18
Receivables for Accrued Income 95,889
Receivables for Capital Shares Issued 31,086
Total Assets 53,101,712
Liabilities  
Foreign Currency Due to Custodian, at Value (Proceeds $3) 3
Payables to Investment Advisor 18,930
Payables for Capital Shares Redeemed 15,817
Payables to Vanguard 3,160
Total Liabilities 37,910
Net Assets 53,063,802
At July 31, 2022, net assets consisted of:  
   
Paid-in Capital 29,805,208
Total Distributable Earnings (Loss) 23,258,594
Net Assets 53,063,802
 
Net Assets  
Applicable to 1,487,643,077 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
53,063,802
Net Asset Value Per Share $35.67
  
See accompanying Notes, which are an integral part of the Financial Statements.
6

 

Dividend Growth Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends1 520,937
Interest2 3,124
Securities Lending—Net
Total Income 524,061
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 34,501
Performance Adjustment 7,006
The Vanguard Group—Note C  
Management and Administrative 34,703
Marketing and Distribution 1,635
Custodian Fees 126
Shareholders’ Reports 223
Trustees’ Fees and Expenses 13
Other Expenses 5
Total Expenses 78,212
Expenses Paid Indirectly (21)
Net Expenses 78,191
Net Investment Income 445,870
Realized Net Gain (Loss)  
Investment Securities Sold2 1,106,933
Foreign Currencies (768)
Realized Net Gain (Loss) 1,106,165
Change in Unrealized Appreciation (Depreciation) of Investment Securities2 (2,986,458)
Net Increase (Decrease) in Net Assets Resulting from Operations (1,434,423)
1 Dividends are net of foreign withholding taxes of $1,580,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $0, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
  
See accompanying Notes, which are an integral part of the Financial Statements.
7

 

Dividend Growth Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 445,870   808,227
Realized Net Gain (Loss) 1,106,165   3,426,528
Change in Unrealized Appreciation (Depreciation) (2,986,458)   7,167,222
Net Increase (Decrease) in Net Assets Resulting from Operations (1,434,423)   11,401,977
Distributions      
Total Distributions (1,748,801)   (2,973,671)
Capital Share Transactions      
Issued 3,746,446   5,053,981
Issued in Lieu of Cash Distributions 1,548,289   2,627,602
Redeemed (3,233,292)   (7,022,848)
Net Increase (Decrease) from Capital Share Transactions 2,061,443   658,735
Total Increase (Decrease) (1,121,781)   9,087,041
Net Assets      
Beginning of Period 54,185,583   45,098,542
End of Period 53,063,802   54,185,583
  
See accompanying Notes, which are an integral part of the Financial Statements.
8

 

Dividend Growth Fund
Financial Highlights
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $37.85 $31.82 $30.63 $26.03 $27.85 $23.72
Investment Operations            
Net Investment Income1 .304 .576 .557 .536 .520 .514
Net Realized and Unrealized Gain (Loss) on Investments (1.276) 7.593 1.572 5.499 (.178) 4.985
Total from Investment Operations (.972) 8.169 2.129 6.035 .342 5.499
Distributions            
Dividends from Net Investment Income (.256) (.574) (.539) (.525) (.526) (.509)
Distributions from Realized Capital Gains (.952) (1.565) (.400) (.910) (1.636) (.860)
Total Distributions (1.208) (2.139) (.939) (1.435) (2.162) (1.369)
Net Asset Value, End of Period $35.67 $37.85 $31.82 $30.63 $26.03 $27.85
Total Return2 -2.63% 25.66% 7.03% 23.33% 1.63% 23.65%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $53,064 $54,186 $45,099 $43,024 $32,856 $34,706
Ratio of Total Expenses to Average Net Assets3 0.30%4 0.27% 0.26% 0.27% 0.22% 0.26%
Ratio of Net Investment Income to Average Net Assets 1.65% 1.56% 1.85% 1.82% 1.93% 2.00%
Portfolio Turnover Rate 9% 15% 15% 17% 23% 15%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.03%, (0.00%), (0.01%), 0.00%, (0.05%), and (0.01%).
4 The ratio of expenses to average net assets for the period net of reduction from custody fee offset and broker commission abatement arrangements was 0.30%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
9

 

Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any
10

 

Dividend Growth Fund
repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple
11

 

Dividend Growth Fund
Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
B. Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the NASDAQ US Dividend Achievers Select Index for periods prior to September 20, 2021, and to the current benchmark S&P U.S. Dividend Growers Index, beginning September 20, 2021, for the preceding three years. The benchmark change will be fully phased in by October 2024. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets, before a net increase of $7,006,000 (0.03%) based on performance.
C. In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $1,931,000, representing less than 0.01% of the fund’s net assets and 0.77% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund has asked its investment advisor to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and
12

 

Dividend Growth Fund
administrative expenses. The fund’s custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the six months ended July 31, 2022, these arrangements reduced the fund’s management and administrative expenses by $14,000 and custodian fees by $7,000. The total expense reduction represented an effective annual rate of less than 0.01% of the fund’s average net assets.
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund’s investments as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks 50,941,895 1,040,896 51,982,791
Temporary Cash Investments 26 989,971 989,997
Total 50,941,921 2,030,867 52,972,788
F. As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 30,945,943
Gross Unrealized Appreciation 22,644,231
Gross Unrealized Depreciation (617,386)
Net Unrealized Appreciation (Depreciation) 22,026,845
G. During the six months ended July 31, 2022, the fund purchased $4,866,130,000 of investment securities and sold $4,788,245,000 of investment securities, other than temporary cash investments.
The fund purchased securities from and sold securities to other funds or accounts managed by its investment advisor or their affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such purchases were $50,920,000 and sales were $0; these
13

 

Dividend Growth Fund
amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
H. Capital shares issued and redeemed were:
    
  Six Months
Ended
July 31,
2022
  Year Ended
January 31,
2022
  Shares
(000)
  Shares
(000)
Issued 103,990   137,831
Issued in Lieu of Cash Distributions 42,294   68,554
Redeemed (90,098)   (192,414)
Net Increase (Decrease) in Shares Outstanding 56,186   13,971
I. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
14

 

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Growth Fund's Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
15

 

This page intentionally left blank.

 

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This material may be used in conjunction with the offering of shares of any Vanguard fund only if preceded or accompanied by the fund’s current prospectus.
You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q572 092022

 

 

Semiannual Report   |   July 31, 2022
Vanguard Dividend Appreciation Index Fund

 

Contents
About Your Fund’s Expenses

1
Financial Statements

4
Trustees Approve Advisory Arrangement

19
Liquidity Risk Management

21

 

About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

 

Six Months Ended July 31, 2022      
  Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Dividend Appreciation Index Fund      
ETF Shares $1,000.00 $950.30 $0.29
Admiral™ Shares 1,000.00 950.30 0.39
Based on Hypothetical 5% Yearly Return      
Dividend Appreciation Index Fund      
ETF Shares $1,000.00 $1,024.50 $0.30
Admiral Shares 1,000.00 1,024.40 0.40
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.06% for ETF Shares and 0.08% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

 

Dividend Appreciation Index Fund
Fund Allocation
As of July 31, 2022
Communication Services 1.9%
Consumer Discretionary 9.2
Consumer Staples 13.3
Energy 0.1
Financials 14.5
Health Care 15.7
Industrials 13.1
Information Technology 24.0
Materials 4.7
Utilities 3.5
The table reflects the fund’s investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The fund may invest in derivatives (such as futures and swap contracts) for various reasons, including, but not limited to, attempting to remain fully invested and tracking its target index as closely as possible.
Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
3

 

Dividend Appreciation Index Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (99.6%)
Communication Services (1.9%)
  Comcast Corp. Class A 27,950,906  1,048,718
  Activision Blizzard Inc.  4,848,121    387,607
  John Wiley & Sons Inc. Class A    269,643     14,081
       1,450,406
Consumer Discretionary (9.1%)
  Home Depot Inc.  6,478,397  1,949,609
  McDonald's Corp.  4,587,462  1,208,200
  NIKE Inc. Class B  7,880,662    905,646
  Lowe's Cos. Inc.  4,215,159    807,329
  Starbucks Corp.  7,296,741    618,618
  Target Corp.  2,921,261    477,276
  Genuine Parts Co.    879,369    134,429
  Tractor Supply Co.    694,590    133,000
  Best Buy Co. Inc.  1,285,183     98,946
  VF Corp.  2,024,721     90,465
  Pool Corp.    248,852     89,014
  Service Corp. International    985,961     73,415
  Williams-Sonoma Inc.    442,412     63,893
  Whirlpool Corp.    359,324     62,116
  Lithia Motors Inc. Class A    179,362     47,581
  Churchill Downs Inc.    212,733     44,631
  Gentex Corp.  1,453,705     41,024
  Polaris Inc.    347,156     40,715
  Thor Industries Inc.    339,908     28,664
  Monro Inc.    207,220     10,392
1 Dillard's Inc. Class A     24,561      5,584
  Aaron's Co. Inc.    194,332      2,530
       6,933,077
Consumer Staples (13.2%)
  Procter & Gamble Co. 15,026,126  2,087,279
  Coca-Cola Co. 24,204,563  1,553,207
  PepsiCo Inc.  8,573,163  1,499,961
  Costco Wholesale Corp.  2,739,717  1,483,009
  Walmart Inc.  8,755,449  1,156,157
  Colgate-Palmolive Co.  5,196,804    409,196
  Archer-Daniels-Midland Co.  3,489,395    288,817
  Sysco Corp.  3,193,265    271,108
  Hershey Co.    905,252    206,361
  Tyson Foods Inc. Class A  1,822,323    160,383
  Kroger Co.  3,115,682    144,692
  McCormick & Co. Inc.  1,551,084    135,487
    Shares Market
Value

($000)
  Church & Dwight Co. Inc.  1,519,288    133,652
  Clorox Co.    763,176    108,249
  J M Smucker Co.    673,397     89,104
  Hormel Foods Corp.  1,759,413     86,810
  Brown-Forman Corp. Class B  1,132,498     84,054
  Casey's General Stores Inc.    229,298     46,467
  Ingredion Inc.    411,357     37,425
  Lancaster Colony Corp.    123,162     16,304
  WD-40 Co.     84,648     15,014
  Nu Skin Enterprises Inc. Class A    313,041     13,621
  J & J Snack Foods Corp.     92,349     12,514
  Andersons Inc.    199,244      7,207
  SpartanNash Co.    221,620      7,156
  Tootsie Roll Industries Inc.    108,119      3,797
      10,057,031
Energy (0.1%)
  Texas Pacific Land Corp.     38,461     70,532
Financials (14.4%)
  JPMorgan Chase & Co. 18,220,214  2,101,884
  S&P Global Inc.  2,153,347    811,661
  Goldman Sachs Group Inc.  2,130,918    710,427
  BlackRock Inc.    885,136    592,315
  Marsh & McLennan Cos. Inc.  3,112,843    510,382
  Chubb Ltd.  2,628,987    495,932
  CME Group Inc.  2,230,134    444,867
  PNC Financial Services Group Inc.  2,581,097    428,307
  Truist Financial Corp.  8,257,436    416,753
  Aon plc Class A (XNYS)  1,351,226    393,261
  Moody's Corp.    995,378    308,816
  Travelers Cos. Inc.  1,517,976    240,903
  Arthur J Gallagher & Co.  1,295,783    231,932
  Aflac Inc.  3,728,440    213,640
  Bank of New York Mellon Corp.  4,731,466    205,630
  Allstate Corp.  1,742,224    203,788
  Ameriprise Financial Inc.    687,472    185,562
  Discover Financial Services  1,772,502    179,023
  T Rowe Price Group Inc.  1,381,406    170,562
  State Street Corp.  2,276,455    161,719
  Fifth Third Bancorp  4,255,474    145,197
4

 

Dividend Appreciation Index Fund
    Shares Market
Value

($000)
  Raymond James Financial Inc.  1,196,397    117,809
  FactSet Research Systems Inc.    234,322    100,683
  Brown & Brown Inc.  1,451,312     94,480
  Cincinnati Financial Corp.    925,495     90,088
  W R Berkley Corp.  1,301,217     81,365
  Cboe Global Markets Inc.    658,655     81,265
  MarketAxess Holdings Inc.    234,303     63,445
  Assurant Inc.    336,042     59,069
  Globe Life Inc.    563,680     56,780
  American Financial Group Inc.    412,359     55,124
  Lincoln National Corp.  1,022,475     52,494
  Reinsurance Group of America Inc.    419,304     48,547
  Commerce Bancshares Inc.    685,684     47,648
  Cullen/Frost Bankers Inc.    351,901     45,888
  Prosperity Bancshares Inc.    572,307     42,402
  SouthState Corp.    473,061     40,101
  Morningstar Inc.    146,297     37,357
  RenaissanceRe Holdings Ltd.    287,160     37,133
  SEI Investments Co.    650,748     36,025
  First Financial Bankshares Inc.    801,222     35,398
  Erie Indemnity Co. Class A    154,240     31,366
  Primerica Inc.    237,798     30,602
  Hanover Insurance Group Inc.    219,929     30,014
  Bank OZK    699,567     28,053
  Home BancShares Inc.  1,181,039     27,873
  RLI Corp.    246,038     27,059
  Evercore Inc. Class A    253,187     25,311
  Independent Bank Corp. (XNGS)    293,558     24,600
  Axis Capital Holdings Ltd.    482,140     24,343
  UMB Financial Corp.    265,568     24,034
  Assured Guaranty Ltd.    397,193     23,192
  Community Bank System Inc.    333,454     22,451
  Simmons First National Corp. Class A    794,338     18,866
  American Equity Investment Life Holding Co.    481,815     18,097
  BOK Financial Corp.    186,390     16,408
  Atlantic Union Bankshares Corp.    467,569     16,173
  First Merchants Corp.    352,624     14,644
  International Bancshares Corp.    329,218     14,440
  BancFirst Corp.    116,459     12,507
  Towne Bank    408,916     12,214
  Lakeland Financial Corp.    155,786     12,120
  Sandy Spring Bancorp Inc.    281,518     11,627
  Stock Yards Bancorp Inc.    167,539     11,585
  Cohen & Steers Inc.    155,586     11,465
  Westamerica BanCorp.    166,428      9,987
  Horace Mann Educators Corp.    256,833      8,797
    Shares Market
Value

($000)
  Southside Bancshares Inc.    200,155      7,994
  Federal Agricultural Mortgage Corp. Class C     57,033      6,290
  Lakeland Bancorp Inc.    384,707      6,125
  Tompkins Financial Corp.     73,445      5,666
  1st Source Corp.    106,090      5,116
  Horizon Bancorp Inc.    241,824      4,612
  First Financial Corp.     69,686      3,256
  Bank of Marin Bancorp     98,551      3,225
  Southern Missouri Bancorp Inc.     46,689      2,518
      10,928,292
Health Care (15.7%)
  UnitedHealth Group Inc.  5,819,952  3,156,393
  Johnson & Johnson 16,323,551  2,848,786
  Abbott Laboratories 10,861,522  1,182,168
  Bristol-Myers Squibb Co. 13,449,313    992,290
  Medtronic plc  8,330,341    770,723
  Elevance Health Inc.  1,495,692    713,595
  Stryker Corp.  2,087,349    448,258
  Becton Dickinson and Co.  1,783,121    435,634
  Humana Inc.    784,526    378,141
  McKesson Corp.    918,991    313,909
  West Pharmaceutical Services Inc.    459,225    157,771
  STERIS plc    621,302    140,197
  AmerisourceBergen Corp. Class A    928,532    135,501
  Quest Diagnostics Inc.    751,027    102,568
  Chemed Corp.     92,794     44,642
  Perrigo Co. plc    836,205     35,012
  Ensign Group Inc.    328,876     26,208
  Embecta Corp.    362,638     10,672
  National HealthCare Corp.     84,972      6,036
  LeMaitre Vascular Inc.    118,833      5,983
  Atrion Corp.      8,508      5,751
      11,910,238
Industrials (13.1%)
  Union Pacific Corp.  3,932,509    893,859
  United Parcel Service Inc. Class B  4,555,846    887,889
  Honeywell International Inc.  4,239,895    816,010
  Caterpillar Inc.  3,309,151    656,039
  Lockheed Martin Corp.  1,488,052    615,771
  Northrop Grumman Corp.    920,356    440,758
  CSX Corp. 13,483,964    435,937
  Waste Management Inc.  2,369,283    389,889
  Eaton Corp. plc  2,474,589    367,204
  Illinois Tool Works Inc.  1,759,302    365,513
  Emerson Electric Co.  3,707,372    333,923
  General Dynamics Corp.  1,437,212    325,773
  L3Harris Technologies Inc.  1,196,333    287,084
  Cintas Corp.    537,699    228,786
  Cummins Inc.    878,606    194,444
  Rockwell Automation Inc.    720,469    183,921
  Fastenal Co.  3,568,162    183,261
  Republic Services Inc. Class A  1,295,600    179,648
  WW Grainger Inc.    266,575    144,892
 
5

 

Dividend Appreciation Index Fund
    Shares Market
Value

($000)
  Dover Corp.    895,273    119,680
  Expeditors International of Washington Inc.  1,041,070    110,614
  Xylem Inc.  1,116,165    102,721
  IDEX Corp.    472,103     98,552
  JB Hunt Transport Services Inc.    520,187     95,335
  Carlisle Cos. Inc.    320,887     95,015
  Stanley Black & Decker Inc.    937,238     91,221
  CH Robinson Worldwide Inc.    790,245     87,480
  Nordson Corp.    333,798     77,104
  Snap-on Inc.    333,396     74,697
  Hubbell Inc. Class B    332,406     72,804
  Graco Inc.  1,050,156     70,528
  HEICO Corp. Class A    463,781     59,216
  Allegion plc    544,824     57,588
  Toro Co.    657,439     56,533
  Regal Rexnord Corp.    416,383     55,920
  Robert Half International Inc.    697,300     55,184
  A O Smith Corp.    818,776     51,804
  Lincoln Electric Holdings Inc.    359,379     50,831
  Pentair plc  1,022,079     49,969
  Lennox International Inc.    205,373     49,193
  Donaldson Co. Inc.    764,095     41,574
  HEICO Corp.    262,848     41,454
  MDU Resources Group Inc.  1,256,807     35,907
  MSA Safety Inc.    227,265     29,167
  ManpowerGroup Inc.    326,355     25,590
  Ryder System Inc.    316,944     24,823
  Insperity Inc.    221,195     24,274
  Applied Industrial Technologies Inc.    238,146     23,955
  GATX Corp.    219,591     22,014
  Franklin Electric Co. Inc.    242,084     21,986
  Hillenbrand Inc.    446,374     20,622
  ABM Industries Inc.    415,496     18,631
  Brady Corp. Class A    300,427     14,375
  McGrath RentCorp.    152,002     12,823
  Trinity Industries Inc.    433,176     11,241
  Lindsay Corp.     67,422     10,380
  Griffon Corp.    294,349      8,833
  Tennant Co.    115,400      7,735
  Standex International Corp.     75,904      7,369
  Apogee Enterprises Inc.    139,032      5,785
  Matthews International Corp. Class A    196,209      5,484
  Douglas Dynamics Inc.    146,563      4,670
  Gorman-Rupp Co.    141,008      4,329
       9,935,611
Information Technology (23.9%)
  Microsoft Corp. 10,696,799  3,003,019
  Visa Inc. Class A  9,878,962  2,095,427
  Mastercard Inc. Class A  5,354,458  1,894,354
  Broadcom Inc.  2,524,954  1,352,062
  Accenture plc Class A  3,926,992  1,202,681
  Cisco Systems Inc. 25,770,005  1,169,185
  Texas Instruments Inc.  5,720,331  1,023,310
  QUALCOMM Inc.  6,904,694  1,001,595
  Intuit Inc.  1,754,023    800,133
  Oracle Corp.  9,997,414    778,199
    Shares Market
Value

($000)
  Automatic Data Processing Inc.  2,600,018    626,916
  Analog Devices Inc.  3,320,438    570,982
  KLA Corp.    931,286    357,185
  Roper Technologies Inc.    656,896    286,847
  Amphenol Corp. Class A  3,628,510    279,867
  TE Connectivity Ltd.  2,002,783    267,832
  Paychex Inc.  1,991,698    255,495
  Motorola Solutions Inc.  1,037,667    247,577
  Microchip Technology Inc.  3,441,060    236,951
  HP Inc.  6,954,406    232,208
  Corning Inc.  4,845,418    178,117
  Broadridge Financial Solutions Inc.    726,687    116,670
  Jack Henry & Associates Inc.    460,009     95,576
  Littelfuse Inc.    153,878     42,912
  Badger Meter Inc.    180,572     17,369
  Cass Information Systems Inc.     71,799      2,618
      18,135,087
Materials (4.7%)
  Linde plc  3,122,701    943,056
  Sherwin-Williams Co.  1,484,406    359,137
  Air Products and Chemicals Inc.  1,373,473    340,937
  Ecolab Inc.  1,541,516    254,612
  Nucor Corp.  1,733,440    235,401
  International Flavors & Fragrances Inc.  1,580,252    196,030
  PPG Industries Inc.  1,464,587    189,356
  Albemarle Corp.    726,089    177,391
  Avery Dennison Corp.    507,092     96,581
  Packaging Corp. of America    581,842     81,813
  Eastman Chemical Co.    832,709     79,882
  Celanese Corp. Class A    678,287     79,706
  Reliance Steel & Aluminum Co.    384,329     73,119
  RPM International Inc.    803,520     72,638
  AptarGroup Inc.    406,747     43,831
  Royal Gold Inc.    407,181     42,660
  Sonoco Products Co.    607,659     38,580
  Ashland Global Holdings Inc.    336,176     33,776
  Balchem Corp.    199,990     27,151
  Cabot Corp.    349,359     25,943
  Avient Corp.    563,391     24,310
  Silgan Holdings Inc.    518,780     23,086
  Scotts Miracle-Gro Co.    251,600     22,380
  Sensient Technologies Corp.    259,730     22,332
  HB Fuller Co.    325,973     20,927
  Westlake Corp.    207,882     20,235
  Stepan Co.    131,246     14,727
  Quaker Chemical Corp.     82,890     13,446
  Worthington Industries Inc.    200,184     10,251
  Hawkins Inc.    114,806      4,564
       3,567,858
Utilities (3.5%)
  NextEra Energy Inc. 12,186,635  1,029,649
  Xcel Energy Inc.  3,376,628    247,102
  WEC Energy Group Inc.  1,955,760    203,027
  Eversource Energy  2,138,118    188,625
 
6

 

Dividend Appreciation Index Fund
    Shares Market
Value

($000)
  American Water Works Co. Inc.  1,127,277    175,224
  DTE Energy Co.  1,200,718    156,454
  CMS Energy Corp.  1,801,297    123,803
  Atmos Energy Corp.    842,313    102,248
  Alliant Energy Corp.  1,558,010     94,930
  Essential Utilities Inc.  1,432,196     74,388
  National Fuel Gas Co.    564,939     40,868
  IDACORP Inc.    314,797     35,169
  ONE Gas Inc.    337,100     28,633
  New Jersey Resources Corp.    597,278     27,588
  California Water Service Group    335,726     20,170
  American States Water Co.    229,893     20,040
  MGE Energy Inc.    223,164     18,161
  Chesapeake Utilities Corp.    110,906     15,209
  SJW Group    170,725     11,210
  Middlesex Water Co.    108,095     10,281
  York Water Co.     88,218      3,792
       2,626,571
Total Common Stocks
(Cost $57,907,133)
75,614,703
    Shares Market
Value

($000)
Temporary Cash Investments (0.3%)
Money Market Fund (0.3%)
2,3 Vanguard Market Liquidity Fund, 1.903% (Cost$198,451)  1,985,269           198,447
Total Investments (99.9%) (Cost $58,105,584) 75,813,150
Other Assets and Liabilities—Net (0.1%) 103,791
Net Assets (100%) 75,916,941
Cost is in $000.
See Note A in Notes to Financial Statements.
1 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $932,000.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
3 Collateral of $959,000 was received for securities on loan.
 

Derivative Financial Instruments Outstanding as of Period End

Futures Contracts
      ($000)
  Expiration Number of
Long (Short)
Contracts
Notional
Amount
Value and
Unrealized
Appreciation
(Depreciation)
Long Futures Contracts        
E-mini S&P 500 Index September 2022 765 158,106 10,877
    
Over-the-Counter Total Return Swaps
Reference Entity  Termination
Date
Counterparty Notional
Amount
($000)
Floating
Interest Rate
Received
(Paid)1
(%)
Value and
Unrealized
Appreciation
($000)
Value and
Unrealized
(Depreciation)
($000)
Kroger Co. 1/31/23 GSI 47,750 (1.570) (1,333)
Visa Inc. Class A 8/31/22 BANA 94,389 (1.470) (89)
          (1,422)
1 Based on 1M USD Overnight Bank Funding Rate as of the most recent payment date. Floating interest payment received/paid monthly.
  1M—1-month.
  BANA—Bank of America, N.A.
  GSI—Goldman Sachs International.
At July 31, 2022, the counterparties had deposited in segregated accounts cash of $5,970,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
7

 

Dividend Appreciation Index Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $57,907,133) 75,614,703
Affiliated Issuers (Cost $198,451) 198,447
Total Investments in Securities 75,813,150
Investment in Vanguard 2,731
Cash Collateral Pledged—Futures Contracts 8,040
Cash Collateral Pledged—Over-the-Counter Swap Contracts 2,060
Receivables for Investment Securities Sold 9,768
Receivables for Accrued Income 92,142
Receivables for Capital Shares Issued 7,120
Variation Margin Receivable—Futures Contracts 2,295
Total Assets 75,937,306
Liabilities  
Due to Custodian 5,115
Payables for Investment Securities Purchased 6,341
Collateral for Securities on Loan 959
Payables for Capital Shares Redeemed 4,488
Payables to Vanguard 2,040
Unrealized Depreciation—Over-the-Counter Swap Contracts 1,422
Total Liabilities 20,365
Net Assets 75,916,941
1 Includes $932 of securities on loan.  
At July 31, 2022, net assets consisted of:  
   
Paid-in Capital 58,331,816
Total Distributable Earnings (Loss) 17,585,125
Net Assets 75,916,941
 
ETF Shares—Net Assets  
Applicable to 416,611,760 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
63,819,075
Net Asset Value Per Share—ETF Shares $153.19
 
Admiral Shares—Net Assets  
Applicable to 291,012,273 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
12,097,866
Net Asset Value Per Share—Admiral Shares $41.57
  
See accompanying Notes, which are an integral part of the Financial Statements.
8

 

Dividend Appreciation Index Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends 750,407
Interest1 557
Securities Lending—Net
Total Income 750,964
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 886
Management and Administrative—ETF Shares 16,331
Management and Administrative—Admiral Shares 4,367
Marketing and Distribution—ETF Shares 1,091
Marketing and Distribution—Admiral Shares 221
Custodian Fees 162
Shareholders’ Reports—ETF Shares 546
Shareholders’ Reports—Admiral Shares 69
Trustees’ Fees and Expenses 20
Other Expenses 5
Total Expenses 23,698
Net Investment Income 727,266
Realized Net Gain (Loss)  
Investment Securities Sold1,2 1,789,278
Futures Contracts (23,309)
Swap Contracts (1,598)
Realized Net Gain (Loss) 1,764,371
Change in Unrealized Appreciation (Depreciation)  
Investment Securities1 (6,425,781)
Futures Contracts 16,426
Swap Contracts (1,424)
Change in Unrealized Appreciation (Depreciation) (6,410,779)
Net Increase (Decrease) in Net Assets Resulting from Operations (3,919,142)
1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $548,000, ($30,000), and ($4,000), respectively. Purchases and sales are for temporary cash investment purposes.
2 Includes $2,143,724,000 of net gain (loss) resulting from in-kind redemptions.
  
See accompanying Notes, which are an integral part of the Financial Statements.
9

 

Dividend Appreciation Index Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 727,266   1,283,185
Realized Net Gain (Loss) 1,764,371   7,696,290
Change in Unrealized Appreciation (Depreciation) (6,410,779)   3,906,835
Net Increase (Decrease) in Net Assets Resulting from Operations (3,919,142)   12,886,310
Distributions      
ETF Shares (578,771)   (1,043,492)
Admiral Shares (108,695)   (206,613)
Total Distributions (687,466)   (1,250,105)
Capital Share Transactions      
ETF Shares 2,078,658   4,113,142
Admiral Shares (46,930)   215,802
Net Increase (Decrease) from Capital Share Transactions 2,031,728   4,328,944
Total Increase (Decrease) (2,574,880)   15,965,149
Net Assets      
Beginning of Period 78,491,821   62,526,672
End of Period 75,916,941   78,491,821
  
See accompanying Notes, which are an integral part of the Financial Statements.
10

 

Dividend Appreciation Index Fund
Financial Highlights
ETF Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $162.69 $137.11 $125.38 $104.09 $107.10 $86.66
Investment Operations            
Net Investment Income1 1.482 2.736 2.299 2.214 2.084 1.951
Net Realized and Unrealized Gain (Loss) on Investments (9.593) 25.504 11.728 21.210 (3.056) 20.408
Total from Investment Operations (8.111) 28.240 14.027 23.424 (.972) 22.359
Distributions            
Dividends from Net Investment Income (1.389) (2.660) (2.297) (2.134) (2.038) (1.919)
Distributions from Realized Capital Gains
Total Distributions (1.389) (2.660) (2.297) (2.134) (2.038) (1.919)
Net Asset Value, End of Period $153.19 $162.69 $137.11 $125.38 $104.09 $107.10
Total Return -4.97% 20.71% 11.44% 22.68% -0.87% 26.10%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $63,819 $65,589 $51,842 $42,217 $30,969 $28,717
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.06% 0.06% 0.06% 0.08%
Ratio of Net Investment Income to Average Net Assets 1.93% 1.74% 1.84% 1.90% 2.01% 2.06%
Portfolio Turnover Rate2 11% 26% 25% 14% 16% 14%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
  
See accompanying Notes, which are an integral part of the Financial Statements.
11

 

Dividend Appreciation Index Fund
Financial Highlights
Admiral Shares            
For a Share Outstanding
Throughout Each Period 
Six Months
Ended
July 31,
2022
Year Ended January 31,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $44.15 $37.21 $34.03 $28.25 $29.07 $23.52
Investment Operations            
Net Investment Income1 .398 .734 .617 .594 .560 .528
Net Realized and Unrealized Gain (Loss) on Investments (2.605) 6.920 3.179 5.757 (.830) 5.542
Total from Investment Operations (2.207) 7.654 3.796 6.351 (.270) 6.070
Distributions            
Dividends from Net Investment Income (.373) (.714) (.616) (.571) (.550) (.520)
Distributions from Realized Capital Gains
Total Distributions (.373) (.714) (.616) (.571) (.550) (.520)
Net Asset Value, End of Period $41.57 $44.15 $37.21 $34.03 $28.25 $29.07
Total Return2 -4.97% 20.67% 11.44% 22.65% -0.89% 26.11%
Ratios/Supplemental Data            
Net Assets, End of Period (Millions) $12,098 $12,903 $10,685 $9,955 $6,755 $6,014
Ratio of Total Expenses to Average Net Assets 0.08% 0.08% 0.08% 0.08% 0.08% 0.08%
Ratio of Net Investment Income to Average Net Assets 1.91% 1.72% 1.82% 1.87% 1.99% 2.06%
Portfolio Turnover Rate3 11% 26% 25% 14% 16% 14%
The expense ratio and net investment income ratio for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.
  
See accompanying Notes, which are an integral part of the Financial Statements.
12

 

Dividend Appreciation Index Fund
Notes to Financial Statements
Vanguard Dividend Appreciation Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: ETF Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca, Inc.; they can be purchased and sold through a broker.
Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Any securities pledged as initial margin for open contracts are noted in the Schedule of Investments.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures contracts.
13

 

Dividend Appreciation Index Fund
During the six months ended July 31, 2022, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
3.  Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any securities pledged as collateral for open contracts are noted in the Schedule of Investments. The value of collateral received or pledged is compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
The notional amounts of swap contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until periodic payments are made or the termination of the swap, at which time realized gain (loss) is recorded.
During the six months ended July 31, 2022, the fund’s average amounts of investments in total return swaps represented less than 1% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is
14

 

Dividend Appreciation Index Fund
generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and
15

 

Dividend Appreciation Index Fund
borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $2,731,000, representing less than 0.01% of the fund’s net assets and 1.09% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. Various inputs may be used to determine the value of the fund’s investments and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
16

 

Dividend Appreciation Index Fund
The following table summarizes the market value of the fund’s investments and derivatives as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks 75,614,703 75,614,703
Temporary Cash Investments 198,447 198,447
Total 75,813,150 75,813,150
Derivative Financial Instruments        
Assets        
Futures Contracts1 10,877 10,877
Liabilities        
Swap Contracts 1,422 1,422
1 Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities.
D. As of July 31, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 58,133,102
Gross Unrealized Appreciation 19,687,635
Gross Unrealized Depreciation (1,996,710)
Net Unrealized Appreciation (Depreciation) 17,690,925
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at January 31, 2022, the fund had available capital losses totaling $2,047,712,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending January 31, 2023; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
E. During the six months ended July 31, 2022, the fund purchased $14,316,029,000 of investment securities and sold $12,273,708,000 of investment securities, other than temporary cash investments. Purchases and sales include $5,775,086,000 and $3,922,035,000, respectively, in connection with in-kind purchases and redemptions of the fund's capital shares.
The fund purchased securities from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the six months ended July 31, 2022, such purchases were $645,125,000 and sales were $693,561,000, resulting in net realized loss of $31,960,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
17

 

Dividend Appreciation Index Fund
F. Capital share transactions for each class of shares were:
    
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
ETF Shares          
Issued 6,003,404 38,666   22,417,718 148,569
Issued in Lieu of Cash Distributions  
Redeemed (3,924,746) (25,200)   (18,304,576) (123,525)
Net Increase (Decrease)—ETF Shares 2,078,658 13,466   4,113,142 25,044
Admiral Shares          
Issued 779,928 18,583   1,970,820 46,680
Issued in Lieu of Cash Distributions 92,770 2,299   176,877 4,201
Redeemed (919,628) (22,118)   (1,931,895) (45,799)
Net Increase (Decrease)—Admiral Shares (46,930) (1,236)   215,802 5,082
G. Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
18

 

Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Dividend Appreciation Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received periodic reports throughout the year, which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review Department’s ongoing assessment of the advisor.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than four decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance compared with its target index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
Cost
The board concluded that the fund’s expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory expenses were also below the peer-group average.
19

 

The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of scale
The board concluded that the fund’s arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
20

 

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Dividend Appreciation Index Fund's Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
21

 

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This material may be used in conjunction with the offering of shares of any Vanguard fund only if preceded or accompanied by the fund’s current prospectus.
You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
© 2022 The Vanguard Group, Inc.
All rights reserved.
U.S. Patent Nos. 6,879,964.
Vanguard Marketing Corporation, Distributor.
Q6022 092022

 

 

Semiannual Report  |  July 31, 2022
Vanguard Global ESG Select Stock Fund


About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund‘s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
1

Six Months Ended July 31, 2022      
  Beginning
Account Value
1/31/2022
Ending
Account Value
7/31/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Global ESG Select Stock Fund      
Investor Shares $1,000.00 $ 917.90 $2.71
Admiral™ Shares 1,000.00 918.50 2.24
Based on Hypothetical 5% Yearly Return      
Global ESG Select Stock Fund      
Investor Shares $1,000.00 $1,021.97 $2.86
Admiral Shares 1,000.00 1,022.46 2.36
The calculations are based on expenses incurred in the most recent six-month period. The fund's annualized six-month expense ratios for that period are 0.57% for Investor Shares and 0.47% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (181/365).
2

Global ESG Select Stock Fund
Fund Allocation
As of July 31, 2022
 
United States 46.3%
United Kingdom 9.2
Japan 6.8
Netherlands 6.8
France 6.6
Spain 5.8
Canada 4.7
Switzerland 3.2
Hong Kong 3.1
Denmark 2.6
Singapore 2.6
Taiwan 2.3
The table reflects the fund's investments, except for short-term investments.
3

Global ESG Select Stock Fund
Financial Statements (unaudited)
Schedule of Investments
As of July 31, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
          Shares Market
Value

($000)
Common Stocks (97.1%)
Canada (4.6%)
  Bank of Nova Scotia   355,279  21,644
  BCE Inc.   275,847  13,937
                   35,581
Denmark (2.5%)
Vestas Wind Systems A/S   744,808  19,576
France (6.4%)
  Cie Generale des Etablissements Michelin SCA   696,291  19,486
  Schneider Electric SE   120,063  16,605
  L'Oreal SA    35,194  13,305
                   49,396
Hong Kong (3.0%)
AIA Group Ltd. 2,323,000  23,338
Japan (6.7%)
  Recruit Holdings Co. Ltd.   814,400  30,436
  Mitsubishi UFJ Financial Group Inc. 3,726,800  20,999
                   51,435
Netherlands (6.6%)
  Koninklijke DSM NV   128,274  20,543
  ING Groep NV 1,909,926  18,553
  Wolters Kluwer NV   109,509  11,893
                   50,989
Singapore (2.5%)
DBS Group Holdings Ltd.   857,387  19,564
Spain (5.6%)
  Industria de Diseno Textil SA 1,081,232  26,260
  Iberdrola SA 1,628,203  17,387
                   43,647
Switzerland (3.2%)
Novartis AG (Registered)   283,851  24,391
Taiwan (2.2%)
  Taiwan Semiconductor Manufacturing Co. Ltd. 1,006,000  17,252
          Shares Market
Value

($000)
United Kingdom (8.9%)
  Compass Group plc   869,432  20,376
  Diageo plc   384,969  18,237
  National Grid plc 1,122,582  15,458
  GSK plc   699,895  14,705
                   68,776
United States (44.9%)
  Microsoft Corp.   146,989  41,266
  Starbucks Corp.   354,863  30,085
  Texas Instruments Inc.   135,082  24,165
  Home Depot Inc.    79,252  23,850
  Merck & Co. Inc.   260,890  23,308
  Visa Inc. Class A   108,644  23,045
  Deere & Co.    66,373  22,778
  Northern Trust Corp.   216,108  21,563
  Cisco Systems Inc.   457,323  20,749
  Prologis Inc.   150,129  19,901
  Ecolab Inc.   100,382  16,580
  Baxter International Inc.   264,985  15,544
  Accenture plc Class A    48,332  14,802
  Progressive Corp.   126,915  14,603
  Automatic Data Processing Inc.    54,145  13,055
  Colgate-Palmolive Co.   163,895  12,905
  Trane Technologies plc    64,598   9,495
                  347,694
Total Common Stocks
(Cost $716,086)
751,639
4

Global ESG Select Stock Fund
          Shares Market
Value

($000)
Temporary Cash Investments (2.9%)
Money Market Fund (2.9%)
1 Vanguard Market Liquidity Fund, 1.903%
(Cost $22,072)
  220,804 22,072
Total Investments (100.0%)
(Cost $738,158)
  773,711
Other Assets and Liabilities—Net (0.0%)   195
Net Assets (100%)   773,906
Cost is in $000.
See Note A in Notes to Financial Statements.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
See accompanying Notes, which are an integral part of the Financial Statements.
5

Global ESG Select Stock Fund
Statement of Assets and Liabilities
As of July 31, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers (Cost $716,086) 751,639
Affiliated Issuers (Cost $22,072) 22,072
Total Investments in Securities 773,711
Investment in Vanguard 26
Cash 347
Receivables for Investment Securities Sold 1,491
Receivables for Accrued Income 1,168
Receivables for Capital Shares Issued 562
Total Assets 777,305
Liabilities  
Due to Custodian 1,490
Payables for Investment Securities Purchased 30
Payables for Capital Shares Redeemed 1,355
Payables to Investment Advisor 443
Payables to Vanguard 81
Total Liabilities 3,399
Net Assets 773,906

At July 31, 2022, net assets consisted of:

   
Paid-in Capital 731,213
Total Distributable Earnings (Loss) 42,693
Net Assets 773,906
 
Investor Shares—Net Assets  
Applicable to 5,645,414 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
159,714
Net Asset Value Per Share—Investor Shares $28.29
 
Admiral Shares—Net Assets  
Applicable to 17,354,073 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
614,192
Net Asset Value Per Share—Admiral Shares $35.39
See accompanying Notes, which are an integral part of the Financial Statements.
6

Global ESG Select Stock Fund
Statement of Operations
  Six Months Ended
July 31, 2022
  ($000)
Investment Income  
Income  
Dividends 1 9,846
Interest 2 70
Total Income 9,916
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 828
Performance Adjustment 75
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 232
Management and Administrative—Admiral Shares 604
Marketing and Distribution—Investor Shares 8
Marketing and Distribution—Admiral Shares 14
Custodian Fees 16
Shareholders’ Reports—Investor Shares 12
Shareholders’ Reports—Admiral Shares 5
Trustees’ Fees and Expenses
Other Expenses 10
Total Expenses 1,804
Net Investment Income 8,112
Realized Net Gain (Loss)  
Investment Securities Sold2 647
Foreign Currencies (69)
Realized Net Gain (Loss) 578
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2 (70,534)
Foreign Currencies (21)
Change in Unrealized Appreciation (Depreciation) (70,555)
Net Increase (Decrease) in Net Assets Resulting from Operations (61,865)
1 Dividends are net of foreign withholding taxes of $877,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $70,000, ($8,000), and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
7

Global ESG Select Stock Fund
Statement of Changes in Net Assets
  Six Months Ended
July 31,
2022
  Year Ended
January 31,
2022
  ($000)   ($000)
Increase (Decrease) in Net Assets      
Operations      
Net Investment Income 8,112   9,979
Realized Net Gain (Loss) 578   9,849
Change in Unrealized Appreciation (Depreciation) (70,555)   70,974
Net Increase (Decrease) in Net Assets Resulting from Operations (61,865)   90,802
Distributions      
Investor Shares (819)   (4,101)
Admiral Shares (3,050)   (14,372)
Total Distributions (3,869)   (18,473)
Capital Share Transactions      
Investor Shares 5,671   65,231
Admiral Shares 58,796   304,765
Net Increase (Decrease) from Capital Share Transactions 64,467   369,996
Total Increase (Decrease) (1,267)   442,325
Net Assets      
Beginning of Period 775,173   332,848
End of Period 773,906   775,173
See accompanying Notes, which are an integral part of the Financial Statements.
8

Global ESG Select Stock Fund
Financial Highlights
Investor Shares        
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31, May 21,
20191 to
January 31,
2020
2022 2021
Net Asset Value, Beginning of Period $30.97 $26.32 $22.34 $20.00
Investment Operations        
Net Investment Income2 .305 .487 .378 .258
Net Realized and Unrealized Gain (Loss) on Investments (2.839) 5.004 3.866 2.257
Total from Investment Operations (2.534) 5.491 4.244 2.515
Distributions        
Dividends from Net Investment Income (.027) (.386) (.229) (.167)
Distributions from Realized Capital Gains (.119) (.455) (.035) (.008)
Total Distributions (.146) (.841) (.264) (.175)
Net Asset Value, End of Period $28.29 $30.97 $26.32 $22.34
Total Return3 -8.21% 20.86% 19.06% 12.57%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $160 $169 $86 $34
Ratio of Total Expenses to Average Net Assets 0.57% 4 0.56% 4 0.55% 4 0.58% 5,6
Ratio of Net Investment Income to Average Net Assets 2.10% 1.61% 1.62% 1.81% 5
Portfolio Turnover Rate 18% 19% 21% 15%
The expense ratio and net investment income ratio for the current period have been annualized.
1 The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $20.00.
2 Calculated based on average shares outstanding.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.01%, and 0.00%.
5 Annualized.
6 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.55%.
See accompanying Notes, which are an integral part of the Financial Statements.
9

Global ESG Select Stock Fund
Financial Highlights
Admiral Shares        
For a Share Outstanding
Throughout Each Period
Six Months
Ended
July 31,
2022
Year Ended January 31, May 21,
20191 to
January 31,
2020
2022 2021
Net Asset Value, Beginning of Period $38.73 $32.91 $27.93 $25.00
Investment Operations        
Net Investment Income2 .395 .649 .504 .338
Net Realized and Unrealized Gain (Loss) on Investments (3.544) 6.258 4.830 2.823
Total from Investment Operations (3.149) 6.907 5.334 3.161
Distributions        
Dividends from Net Investment Income (.043) (.517) (.310) (.221)
Distributions from Realized Capital Gains (.148) (.570) (.044) (.010)
Total Distributions (.191) (1.087) (.354) (.231)
Net Asset Value, End of Period $35.39 $38.73 $32.91 $27.93
Total Return3 -8.15% 20.99% 19.17% 12.64%
Ratios/Supplemental Data        
Net Assets, End of Period (Millions) $614 $606 $247 $74
Ratio of Total Expenses to Average Net Assets 0.47% 4 0.46% 4 0.45% 4 0.48% 5,6
Ratio of Net Investment Income to Average Net Assets 2.18% 1.71% 1.71% 1.89% 5
Portfolio Turnover Rate 18% 19% 21% 15%
The expense ratio and net investment income ratio for the current period have been annualized.
1 The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $25.00.
2 Calculated based on average shares outstanding.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.01%, and 0.00%.
5 Annualized.
6 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.45%.
See accompanying Notes, which are an integral part of the Financial Statements.
10

Global ESG Select Stock Fund
Notes to Financial Statements
Vanguard Global ESG Select Stock Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia's invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund performance.
A.  The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities.
Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
11

Global ESG Select Stock Fund
5. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended July 31, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B.    Wellington Management Company llp provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance relative to the FTSE All-World Index since July 31, 2019. For the six months ended July 31, 2022, the investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets, before a net increase of $75,000 (0.02%) based on performance.
12

Global ESG Select Stock Fund
C.  In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At July 31, 2022, the fund had contributed to Vanguard capital in the amount of $26,000, representing less than 0.01% of the fund’s net assets and 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D.  Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund's investments as of July 31, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks—North and South America 383,275 383,275
Common Stocks—Other 368,364 368,364
Temporary Cash Investments 22,072 22,072
Total 405,347 368,364 773,711
E.  As of July 31, 2022, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 739,803
Gross Unrealized Appreciation 81,467
Gross Unrealized Depreciation (47,559)
Net Unrealized Appreciation (Depreciation) 33,908
13

Global ESG Select Stock Fund
F.  During the six months ended July 31, 2022, the fund purchased $193,810,000 of investment securities and sold $131,220,000 of investment securities, other than temporary cash investments.
G.  Capital share transactions for each class of shares were:
  Six Months Ended
July 31, 2022
  Year Ended
January 31, 2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 27,394 952   125,865 4,203
Issued in Lieu of Cash Distributions 713 24   3,550 113
Redeemed (22,436) (797)   (64,184) (2,117)
Net Increase (Decrease)—Investor Shares 5,671 179   65,231 2,199
Admiral Shares          
Issued 126,583 3,610   414,883 11,050
Issued in Lieu of Cash Distributions 2,520 68   11,765 301
Redeemed (70,307) (1,970)   (121,883) (3,207)
Net Increase (Decrease)—Admiral Shares 58,796 1,708   304,765 8,144
H.  Management has determined that no events or transactions occurred subsequent to July 31, 2022, that would require recognition or disclosure in these financial statements.
14

Liquidity Risk Management
Vanguard funds (except for the money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund.
Assessment and management of a fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and limiting holdings of illiquid investments.
The board of trustees of Vanguard Specialized Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Global ESG Select Stock Fund’s Program and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
15

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© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q5472 092022

 

 

 

Item 2: Code of Ethics.

 

Not applicable.

 

Item 3: Audit Committee Financial Expert.

 

Not applicable.

 

Item 4: Principal Accountant Fees and Services.

 

Not applicable.

 

Item 5: Audit Committee of Listed Registrants.

 

Not applicable.

 

 

 

Item 6: Investments.

 

Not applicable. The complete schedule of investments is included as part of the report to shareholders filed under Item 1 of this Form.

 

Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

 

Not applicable.

 

Item 8: Portfolio Managers of Closed-End Management Investment Companies.

 

Not applicable.

 

Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

 

Not applicable.

 

Item 10: Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

Item 11: Controls and Procedures.

 

(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

 

(b) Internal Control Over Financial Reporting. There were no significant changes in the Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Item 12: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.

 

Not applicable.

 

Item 13: Exhibits.

 

(a)(1) Not applicable.
(a)(2) Certifications filed herewith.
(b) Certifications filed herewith.

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  VANGUARD SPECIALIZED FUNDS  
     
BY: /s/ MORTIMER J. BUCKLEY*  
  MORTIMER J. BUCKLEY  
  CHIEF EXECUTIVE OFFICER  

 

Date: September 19, 2022

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

  VANGUARD SPECIALIZED FUNDS  
     
BY: /s/ MORTIMER J. BUCKLEY*  
  MORTIMER J. BUCKLEY  
  CHIEF EXECUTIVE OFFICER  

 

Date: September 19, 2022

 

  VANGUARD SPECIALIZED FUNDS  
     
BY: /s/ CHRISTINE BUCHANAN*  
  CHRISTINE BUCHANAN  
  CHIEF FINANCIAL OFFICER  

 

Date: September 19, 2022

 

* By: /s/ Anne E. Robinson  

 

Anne E. Robinson, pursuant to a Power of Attorney filed on November 29, 2021 (see File Number 33-64845), a Power of Attorney filed on October 12, 2021 (see File Number 33-23444), and a Power of Attorney filed on August 26, 2021 (see file Number 811-02652), Incorporated by Reference.

 

 

EX-99.CERT 2 tm2224981d2_ex99-cert.htm EXHIBIT 99.CERT

Exhibit 99.CERT

 

CERTIFICATIONS

 

I, Mortimer J. Buckley, certify that:

 

1. I have reviewed this report on Form N-CSR of Vanguard Specialized Funds;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:    September 19, 2022

 

  /s/ Mortimer J. Buckley
  Mortimer J. Buckley      
Chief Executive Officer

 

 

 

CERTIFICATIONS

 

I, Christine Buchanan, certify that:

 

1. I have reviewed this report on Form N-CSR of Vanguard Specialized Funds;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:    September 19, 2022

 

  /s/ Christine Buchanan
  Christine Buchanan      
Chief Financial Officer

 

 

EX-99.906 CERT 3 tm2224981d2_ex99-906cert.htm EXHIBIT 99.906 CERT

Exhibit 99.906CERT

 

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

Name of Issuer: Vanguard Specialized Funds

 

In connection with the Report on Form N-CSR of the above-named issuer that is accompanied by this certification, the undersigned hereby certifies, to his knowledge, that:

 

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

 

Date:     September 19, 2022

 

  /s/ Mortimer J. Buckley
  Mortimer J. Buckley      
  Chief Executive Officer

 

 

 

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

 

Name of Issuer: Vanguard Specialized Funds

 

In connection with the Report on Form N-CSR of the above-named issuer that is accompanied by this certification, the undersigned hereby certifies, to her knowledge, that:

 

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

 

Date:     September 19, 2022

 

  /s/ Christine Buchanan
  Christine Buchanan       
  Chief Financial Officer

 

 

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