N-CSR 1 tm234052d2_ncsr.htm N-CSR

 

 

 

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—January 31, 2023

 

 

 

 

 

 

Item 1: Reports to Shareholders

 

 

 

 

 

 

 

 

Annual Report   |   January 31, 2023
Vanguard Energy Fund

 

Contents
Your Fund’s Performance at a Glance

1
Advisor's Report

2
About Your Fund’s Expenses

5
Performance Summary

7
Financial Statements

9
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Performance at a Glance
For the 12 months ended January 31, 2023, Vanguard Energy Fund returned 16.72% for Investor Shares and 16.83% for Admiral Shares. It outpaced the 11.88% return of its benchmark index.
Despite some relief in midsummer and toward the end of the period, it was a volatile, challenging time for financial markets. Early on, inflation readings around much of the world continued climbing to multidecade highs amid supply chain bottlenecks, rising energy and food prices, and broader price increases in goods and services. Central banks responded by aggressively tightening monetary policy. Later, it appeared that inflation might have peaked, and central banks began slowing their pace of interest rate hikes.
Sticky inflation, dramatic rate hikes, and fears of a recession weighed heavily on sentiment in the stock market. Energy was one of the few sectors that posted positive returns for the 12-month period.
The fund’s stock selection in integrated oil and gas companies lagged those in the benchmark. That and the fund’s underweight to that sector were the largest detractors to relative performance. However, this was more than offset by stock selection in other sectors—notably in oil and gas refining and marketing, and electric utilities—that boosted absolute and relative results. The fund’s overweight to oil and gas exploration and production also helped relative performance.
Market Barometer
  Average Annual Total Returns
Periods Ended January 31, 2023
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) -8.55% 9.66% 9.38%
Russell 2000 Index (Small-caps) -3.38 7.51 5.54
Russell 3000 Index (Broad U.S. market) -8.24 9.51 9.12
FTSE All-World ex US Index (International) -5.39 4.15 1.73
Bonds      
Bloomberg U.S. Aggregate Float Adjusted Index
(Broad taxable market)
-8.40% -2.34% 0.89%
Bloomberg Municipal Bond Index
(Broad tax-exempt market)
-3.25 -0.42 2.07
FTSE Three-Month U.S. Treasury Bill Index 1.87 0.78 1.29
CPI      
Consumer Price Index 6.41% 5.06% 3.83%
1

 

Advisor’s Report
Investment Strategy
Vanguard Energy Fund focuses on long-term total return through exposure to diversified energy companies. We believe that the future of energy will become increasingly carbon-free and therefore take a comprehensive approach to defining opportunities in the evolving sector.
Our custom energy and utilities benchmark, which is meant to represent the breadth of this opportunity, is a market-cap-weighted index of the holdings in the existing MSCI ACWI Energy and MSCI ACWI Utilities indexes, which seek to measure the performance of energy-related and utility equities, respectively, in developed and emerging markets. We invest in a diverse set of subindustries, including integrated oil, oil and gas exploration and production, refining and marketing, energy equipment and services, electric networks, natural gas networks, and independent, renewable power. Our portfolio represents the energy sector as a whole, though the weightings of the underlying subindustries reflect the relative attractiveness of stocks within them.
Investment environment
During the 12 months ended January 31, 2023, global equities as represented by the MSCI All Country World Index returned –7.54%. In contrast, our custom energy and utilities benchmark returned 11.88%.
In 2022, energy prices continued to exhibit strength, supported by an
undersupplied market and the ongoing conflict between Russia and Ukraine. While demand is slowly returning to pre-pandemic levels, particularly with China’s reopening, oil producer discipline remains intact. OPEC+ continues to manage the market, while U.S. producers maintain their recently acquired preference for shareholder distributions over increasing volumes. This dynamic remains in place heading into 2023, with the added prospect of tightening OPEC+ spare capacity and the expected end of withdrawals from the U.S. Strategic Petroleum Reserve.
Our successes and shortfalls
The fund returned 16.72% for Investor Shares, outpacing the benchmark return of 11.88% during the 12-month period. Security selection decisions contributed to relative outperformance, while sector allocation, a result of our stock selection process, detracted.
Strong stock selection in the refining and marketing sector added to positive relative performance. From an allocation perspective, the fund’s overweight to integrated oils was a detractor.
On an individual security basis, an overweight to Marathon Petroleum and not owning Gazprom added the most value, while not owning ExxonMobil and an overweight to Lukoil detracted the most.
Marathon Petroleum is a U.S. petroleum refining, marketing, and transportation company. Shares outperformed during the period as the company reported strong
 
2

 

results and executed a significant share buyback. Marathon’s adjusted earnings and revenues beat estimates, benefiting from a tight supply-demand balance for refined products. Gazprom, the Russian multinational energy company, had its international shares delisted from major stock exchanges following the Russian invasion of Ukraine.
Not owning ExxonMobil weighed on relative performance over the period as the company performed well, aided by high oil and gas prices and record high refining margins. Nevertheless, looking forward, we continue to prefer the European majors (Shell, BP, TotalEnergies) relative to the U.S. leaders (ExxonMobil and Chevron) for three key reasons: The European companies currently offer more attractive valuations, lower dividend payout ratios, and more explicit strategies attempting to address the energy transition.
We are particularly bullish on Shell and BP because of their leadership positions in liquefied natural gas (LNG) and strong customer-facing businesses. Currently, Shell and BP offer superior valuations and high free cash flow yields after dividends. Now that their balance sheets are in relatively strong positions, we expect continued and significant share buybacks in 2023.
The fund’s positioning
While there are still uncertainties about the pace and shape of the global economic recovery, we believe that oil supply and demand balances will remain
relatively tight as we enter 2023, offering a supportive backdrop for energy stocks. We anticipate tight supply will be driven by ongoing discipline from OPEC+, sanctions on Russian oil, and continuing capital discipline from U.S. shale producers, while China’s earlier-than-expected emergence from its zero-COVID policy should support stronger-than-expected full-year demand.
A warm start to winter has pushed near-term natural gas prices lower globally. As a result of the more favorable backdrop for oil over natural gas, we have shifted positioning more toward oil-leveraged stocks (such as Diamondback Energy) and away from gas-leveraged stocks (such as EQT Corporation). However, in the long term, we remain positive on global gas and LNG fundamentals and so retain large positions in major gas and LNG suppliers, notably Shell, BP, TotalEnergies, and Equinor.
The disruptions in energy supply caused by Russia’s invasion of Ukraine have led governments globally to reassess energy security and redouble efforts toward domestic energy supply. Added to the megatrend of decarbonization, this means that carbon-free domestic electricity is now experiencing multiple major tailwinds. The support for solar, wind, battery storage, and nuclear power in the U.S. Inflation Reduction Act (IRA), the extension of nuclear power plant lives in Europe, and Europe’s planned response to the U.S. IRA are all evidence of strong and lasting support for clean electricity and decarbonization. To benefit from this
3

 

megatrend, the fund retains a meaningful position in clean energy infrastructure, concentrated in electricity networks and clean energy generation.
Over the long term, we believe that the growth and stability provided by clean energy exposure, combined with the higher yet more volatile returns provided by oil and gas equities, will allow the fund to deliver attractive risk-adjusted returns.
G. Thomas Levering,    
Senior Managing Director,                                                                      
Global Industry Analyst
Wellington Management Company llp
February 10, 2023
4

 

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.
5

 

Six Months Ended January 31, 2023      
  Beginning
Account Value
7/31/2022
Ending
Account Value
1/31/2023
Expenses
Paid During
Period
Based on Actual Fund Return      
Energy Fund      
Investor Shares $1,000.00 $1,089.20 $2.53
Admiral™ Shares 1,000.00 1,089.60 2.11
Based on Hypothetical 5% Yearly Return      
Energy Fund      
Investor Shares $1,000.00 $1,022.79 $2.45
Admiral Shares 1,000.00 1,023.19 2.04
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 0.48% for Investor Shares and 0.40% 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 (184/365).
6

 

Energy Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2013, Through January 31, 2023
Initial Investment of $10,000
    Average Annual Total Returns
Periods Ended January 31, 2023
 
    One
Year
Five
Years
Ten
Years
Final Value
of a $10,000
Investment
 Energy Fund Investor Shares 16.72% 0.13% 0.72% $10,747
 Spliced Energy Index 11.88 -2.23 -0.84 9,194
 Dow Jones U.S. Total Stock Market Float Adjusted Index -8.42 8.99 12.19 31,581
Spliced Energy Index: MSCI All Country World Energy Index through October 20, 2020; MSCI All Country World Energy + Utilities Index thereafter.
       
    One
Year
Five
Years
Ten
Years
Final Value
of a $50,000
Investment
Energy Fund Admiral Shares 16.83% 0.21% 0.80% $54,137
Spliced Energy Index 11.88 -2.23 -0.84 45,972
Dow Jones U.S. Total Stock Market Float Adjusted Index -8.42 8.99 12.19 157,905
See Financial Highlights for dividend and capital gains information.
7

 

Energy Fund
Fund Allocation
As of January 31, 2023
United States 53.4%
United Kingdom 17.9
France 9.9
Canada 6.5
Italy 3.3
Spain 2.4
Norway 2.0
India 1.6
Germany 1.3
Brazil 1.0
Other 0.7
The table reflects the fund’s investments, except for short-term investments.
8

 

Energy Fund
Financial Statements
Schedule of Investments
As of January 31, 2023
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 (99.1%)
Brazil (1.0%)
  Petroleo Brasileiro SA   10,733,525    62,291
Canada (6.4%)
  Cenovus Energy Inc.  9,517,662   190,163
1 Enbridge Inc.  3,586,487   146,851
  ARC Resources Ltd.  1,735,762    20,168
  TC Energy Corp.    426,524    18,378
  TC Energy Corp. (XTSE)    398,407    17,187
        392,747
China (0.7%)
  China Yangtze Power Co. Ltd. Class A   13,244,460    40,793
France (9.8%)
  TotalEnergies SE  4,006,239   247,669
  Engie SA (XPAR) 12,909,716   183,316
  TotalEnergies SE ADR  2,761,952   171,352
        602,337
Germany (1.3%)
  RWE AG    1,840,525    81,938
India (1.6%)
  Power Grid Corp. of India Ltd.   37,222,540    98,779
Italy (3.3%)
  Tenaris SA  6,229,860   110,398
  Enel SpA 15,780,455    92,917
        203,315
Norway (2.0%)
  Equinor ASA    3,973,475   121,098
Russia (0.0%)
*,2 LUKOIL PJSC ADR    1,423,477        —
Spain (2.4%)
  Iberdrola SA (XMAD) 12,033,572   141,175
  Iberdrola SA    201,835     2,358
        143,533
United Kingdom (17.7%)
  Shell plc (XLON) 11,675,963   342,780
  BP plc 45,226,687   273,181
  Shell plc ADR  3,863,908   227,237
  BP plc ADR  3,529,398   127,870
  National Grid plc  8,844,572   112,440
      1,083,508
    Shares Market
Value

($000)
United States (52.9%)
  Marathon Petroleum Corp.  3,629,400   466,450
  ConocoPhillips  3,719,886   453,343
  Duke Energy Corp.  1,751,647   179,456
  Diamondback Energy Inc.  1,114,821   162,898
  NextEra Energy Inc.  2,167,740   161,778
  Exelon Corp.  3,768,354   158,987
  EOG Resources Inc.  1,167,829   154,445
  Coterra Energy Inc.  6,120,212   153,189
  Southern Co.  2,087,721   141,297
  FirstEnergy Corp.  3,334,765   136,559
  Chesapeake Energy Corp.  1,507,060   130,692
  Sempra Energy (XNYS)    799,397   128,167
  American Electric Power Co. Inc.  1,313,994   123,463
  Edison International  1,746,546   120,337
  Williams Cos. Inc.  3,153,024   101,654
  Schlumberger NV  1,519,225    86,565
  Constellation Energy Corp.    897,726    76,630
  CenterPoint Energy Inc.  2,528,118    76,147
  Targa Resources Corp.    983,114    73,753
* First Solar Inc.    354,172    62,901
  Avangrid Inc.  1,106,747    46,672
  Pioneer Natural Resources Co.    188,653    43,456
      3,238,839
Total Common Stocks (Cost $4,404,902) 6,069,178
Temporary Cash Investments (2.8%)
Money Market Fund (1.8%)
3,4 Vanguard Market Liquidity Fund 4.437%   1,097,977   109,787
9

 

Energy Fund
    Face
Amount
($000)
Market
Value

($000)
Repurchase Agreement (1.0%)
  NatWest Markets plc, 4.260%, 2/1/23
(Dated 1/31/23, Repurchase Value $62,907,000, collateralized by U.S. Treasury Note/Bond 2.375%, 4/30/26, with a value of $64,158,000) 
    62,900    62,900
Total Temporary Cash Investments (Cost $172,686) 172,687
Total Investments (101.9%) (Cost $4,577,588) 6,241,865
Other Assets and Liabilities—Net (-1.9%) (115,896)
Net Assets (100%) 6,125,969
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 $104,411,000.
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 $109,650,000 was received for securities on loan.
  ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
10

 

Energy Fund
Statement of Assets and Liabilities
As of January 31, 2023
($000s, except shares, footnotes, and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $4,467,802) 6,132,078
Affiliated Issuers (Cost $109,786) 109,787
Total Investments in Securities 6,241,865
Investment in Vanguard 228
Foreign Currency, at Value (Cost $180) 179
Receivables for Investment Securities Sold 18,377
Receivables for Accrued Income 6,644
Receivables for Capital Shares Issued 2,325
Total Assets 6,269,618
Liabilities  
Due to Custodian 1,622
Payables for Investment Securities Purchased 18,388
Collateral for Securities on Loan 109,650
Payables to Investment Advisor 4,127
Payables for Capital Shares Redeemed 5,138
Payables to Vanguard 825
Deferred Foreign Capital Gains Taxes 3,899
Total Liabilities 143,649
Net Assets 6,125,969
1 Includes $104,411,000 of securities on loan.  
At January 31, 2023, net assets consisted of:  
   
Paid-in Capital 4,882,222
Total Distributable Earnings (Loss) 1,243,747
Net Assets 6,125,969
 
Investor Shares—Net Assets  
Applicable to 41,994,923 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
1,949,974
Net Asset Value Per Share—Investor Shares $46.43
 
Admiral Shares—Net Assets  
Applicable to 47,934,110 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
4,175,995
Net Asset Value Per Share—Admiral Shares $87.12
  
See accompanying Notes, which are an integral part of the Financial Statements.
11

 

Energy Fund
Statement of Operations
  Year Ended
January 31, 2023
  ($000)
Investment Income  
Income  
Dividends1 300,110
Interest2 1,220
Securities Lending—Net 158
Total Income 301,488
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 8,871
Performance Adjustment 3,520
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 4,280
Management and Administrative—Admiral Shares 6,026
Marketing and Distribution—Investor Shares 111
Marketing and Distribution—Admiral Shares 158
Custodian Fees 98
Auditing Fees 31
Shareholders’ Reports—Investor Shares 84
Shareholders’ Reports—Admiral Shares 41
Trustees’ Fees and Expenses 2
Other Expenses 348
Total Expenses 23,570
Expenses Paid Indirectly (9)
Net Expenses 23,561
Net Investment Income 277,927
Realized Net Gain (Loss)  
Investment Securities Sold2,3 264,307
Foreign Currencies (2,045)
Realized Net Gain (Loss) 262,262
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2,4 339,360
Foreign Currencies 279
Change in Unrealized Appreciation (Depreciation) 339,639
Net Increase (Decrease) in Net Assets Resulting from Operations 879,828
1 Dividends are net of foreign withholding taxes of $12,111,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $50,000, and $1,000, respectively. Purchases and sales are for temporary cash investment purposes.
3 Realized gain (loss) is net of foreign capital gain taxes of $38,000.
4 The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($321,000).
  
See accompanying Notes, which are an integral part of the Financial Statements.
12

 

Energy Fund
Statement of Changes in Net Assets
  Year Ended January 31,
  2023
($000)
2022
($000)
     
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 277,927 177,015
Realized Net Gain (Loss) 262,262 116,270
Change in Unrealized Appreciation (Depreciation) 339,639 1,155,587
Net Increase (Decrease) in Net Assets Resulting from Operations 879,828 1,448,872
Distributions    
Investor Shares (85,883) (57,404)
Admiral Shares (187,798) (119,222)
Total Distributions (273,681) (176,626)
Capital Share Transactions    
Investor Shares (18,400) (14,569)
Admiral Shares 159,170 7,935
Net Increase (Decrease) from Capital Share Transactions 140,770 (6,634)
Total Increase (Decrease) 746,917 1,265,612
Net Assets    
Beginning of Period 5,379,052 4,113,440
End of Period 6,125,969 5,379,052
  
See accompanying Notes, which are an integral part of the Financial Statements.
13

 

Energy Fund
Financial Highlights
Investor Shares          
For a Share Outstanding
Throughout Each Period 
Year Ended January 31,
2023 2022 2021 2020 2019
Net Asset Value, Beginning of Period $41.64 $31.66 $43.28 $47.85 $55.62
Investment Operations          
Net Investment Income1 2.099 1.364 1.449 1.519 1.300
Net Realized and Unrealized Gain (Loss) on Investments 4.807 10.019 (11.669) (4.524) (7.788)
Total from Investment Operations 6.906 11.383 (10.220) (3.005) (6.488)
Distributions          
Dividends from Net Investment Income (2.116) (1.403) (1.400) (1.565) (1.282)
Distributions from Realized Capital Gains
Total Distributions (2.116) (1.403) (1.400) (1.565) (1.282)
Net Asset Value, End of Period $46.43 $41.64 $31.66 $43.28 $47.85
Total Return2 16.72% 36.33% -23.55% -6.55% -11.48%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $1,950 $1,771 $1,363 $1,793 $2,265
Ratio of Total Expenses to Average Net Assets3 0.46%4 0.41% 0.37% 0.32% 0.37%
Ratio of Net Investment Income to Average Net Assets 4.70% 3.68% 4.49% 3.20% 2.42%
Portfolio Turnover Rate 16% 14% 55% 48% 31%
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 0.06%, 0.02%, (0.02%), (0.06%), and (0.01%).
4 The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.46%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
14

 

Energy Fund
Financial Highlights
Admiral Shares          
For a Share Outstanding
Throughout Each Period 
Year Ended January 31,
2023 2022 2021 2020 2019
Net Asset Value, Beginning of Period $78.12 $59.39 $81.18 $89.77 $104.35
Investment Operations          
Net Investment Income1 4.014 2.615 2.787 2.926 2.511
Net Realized and Unrealized Gain (Loss) on Investments 9.026 18.794 (21.903) (8.512) (14.600)
Total from Investment Operations 13.040 21.409 (19.116) (5.586) (12.089)
Distributions          
Dividends from Net Investment Income (4.040) (2.679) (2.674) (3.004) (2.491)
Distributions from Realized Capital Gains
Total Distributions (4.040) (2.679) (2.674) (3.004) (2.491)
Net Asset Value, End of Period $87.12 $78.12 $59.39 $81.18 $89.77
Total Return2 16.83% 36.43% -23.47% -6.50% -11.40%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,176 $3,608 $2,751 $4,388 $5,606
Ratio of Total Expenses to Average Net Assets3 0.38%4 0.33% 0.29% 0.24% 0.29%
Ratio of Net Investment Income to Average Net Assets 4.78% 3.76% 4.60% 3.28% 2.50%
Portfolio Turnover Rate 16% 14% 55% 48% 31%
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 0.06%, 0.02%, (0.02%), (0.06%), and (0.01%).
4 The ratio of expenses to average net assets for the period net of reduction from broker commission abatement arrangements was 0.38%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
15

 

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 by methods deemed by the valuation designee to represent fair value and subject to oversight by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value. 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
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Energy Fund
prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty's default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute virtually all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial reporting purposes.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 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
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Energy Fund
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 year ended January 31, 2023, 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. Amounts related to these reclaims are recorded when there are no significant uncertainties as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment. Such tax reclaims and related professional fees, if any, are included in dividend income and other expenses, respectively.
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 year ended January 31, 2023, 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 $3,520,000 (0.06%) based on performance.
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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 January 31, 2023, the fund had contributed to Vanguard capital in the amount of $228,000, representing less than 0.01% of the fund’s net assets and 0.09% 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 year ended January 31, 2023, these arrangements reduced the fund’s expenses by $9,000 (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 January 31, 2023, 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 3,693,877 3,693,877
Common Stocks—Other 526,459 1,848,842 2,375,301
Temporary Cash Investments 109,787 62,900 172,687
Total 4,330,123 1,911,742 6,241,865
F. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for applicable foreign currency transactions and tax expense on capital gains were reclassified between the individual components of total distributable earnings (loss).
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Energy Fund
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the deferral of losses from wash sales. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
  Amount
($000)
Undistributed Ordinary Income 11,515
Undistributed Long-Term Gains
Capital Loss Carryforwards (426,695)
Qualified Late-Year Losses
Net Unrealized Gains (Losses) 1,658,927
The tax character of distributions paid was as follows:
  Year Ended January 31,
  2023
Amount
($000)
2022
Amount
($000)
Ordinary Income* 273,681 176,626
Long-Term Capital Gains
Total 273,681 176,626
* Includes short-term capital gains, if any.
As of January 31, 2023, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 4,579,311
Gross Unrealized Appreciation 1,800,978
Gross Unrealized Depreciation (138,423)
Net Unrealized Appreciation (Depreciation) 1,662,555
G. During the year ended January 31, 2023, the fund purchased $1,112,425,000 of investment securities and sold $947,361,000 of investment securities, other than temporary cash investments.
20

 

Energy Fund
H. Capital share transactions for each class of shares were:
    
  Year Ended January 31,  
  2023   2022
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 545,067 12,243   433,225 11,662
Issued in Lieu of Cash Distributions 79,747 1,759   53,100 1,381
Redeemed (643,214) (14,541)   (500,894) (13,551)
Net Increase (Decrease)—Investor Shares (18,400) (539)   (14,569) (508)
Admiral Shares          
Issued 1,135,398 13,603   851,809 12,163
Issued in Lieu of Cash Distributions 166,639 1,960   105,042 1,455
Redeemed (1,142,867) (13,815)   (948,916) (13,745)
Net Increase (Decrease)—Admiral Shares 159,170 1,748   7,935 (127)
I. Management has determined that no events or transactions occurred subsequent to January 31, 2023, that would require recognition or disclosure in these financial statements.
21

 

Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Energy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Vanguard Energy Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the "Fund") as of January 31, 2023, the related statement of operations for the year ended January 31, 2023, the statement of changes in net assets for each of the two years in the period ended January 31, 2023, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2023 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2023, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended January 31, 2023 and the financial highlights for each of the five years in the period ended January 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2023 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers  LLP 
Philadelphia, Pennsylvania
March 23, 2023
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
22

 


Tax information (unaudited)
Pending Client Information
For corporate shareholders, 51.3%, or if subsequently determined to be different, the maximum percentage allowable by law, of ordinary income (dividend income plus short-term gains, if any) for the fiscal year qualified for the dividends-received deduction.
The fund hereby designates $257,616,000, or if subsequently determined to be different, the maximum amount allowable by law, as qualified dividend income for individual shareholders for the fiscal year.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them. 
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 206 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018–present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Member of the board of governors of the Investment Company Institute and the board of governors of FINRA. Trustee and vice chair of The Shipley School.
Independent Trustees
Tara Bunch
Born in 1962. Trustee since November 2021. Principal occupation(s) during the past five years and other experience: head of global operations at Airbnb (2020–present). Vice president of AppleCare (2012–2020). Member of the board of directors of Out & Equal, the advisory board of the University of California, Berkeley School of Engineering, and the advisory board of Santa Clara University’s Leavey School of Business.
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Member of the board of directors of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, Roberts Wesleyan College, and the Rochester Philharmonic Orchestra. Trustee of the University of Rochester.                            
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (global industrial company). Director of the V Foundation. Member of the advisory council for the College of Arts and Letters at the University of Notre Dame. Chairman of the board of Saint Anselm College.
Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other
 
1  Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

 

experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (retired 2020) and vice president (retired 2020) of the University of Notre Dame. Chair of the board of Catholic Investment Services, Inc. (investment advisors). Member of the board of superintendence of the Institute for the Works of Religion, the Notre Dame 403(b) Investment Committee, and the board of directors of Paxos Trust Company (finance).
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer of Purposeful (advisory firm for CEOs and C-level executives; 2021–present). Board chair (2020), chief executive officer (2011–2020), and president (2010–2019) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of the Guardian Life Insurance Company of America. Director of DuPont. Member of the board of the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, and the NewYork-Presbyterian Hospital.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and partner of HighVista Strategies (private investment firm). Member of the board of RIT Capital Partners (investment firm).
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Colin W. Brown Distinguished Professor of the Practice of Law, Duke Law School (2021–present); Rubenstein Fellow, Duke University (2017–2020); Distinguished Fellow of the Global Financial Markets Center, Duke Law School
(2020–2022); and Senior Fellow, Duke Center on Risk (2020–present). Partner of Kaya Corporation Ltd. (climate policy advisory services). Member of the board of directors of Arcadia Corporation (energy solution technology).
David Thomas
Born in 1956. Trustee since July 2021. Principal occupation(s) during the past five years and other experience: president of Morehouse College (2018–present). Professor of business administration, emeritus at Harvard University (2017–2018). Dean (2011–2016) and professor of management (2016–2017) at the Georgetown University McDonough School of Business. Director of DTE Energy Company. Trustee of Common Fund.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Member of the BMW Group Mobility Council.

 

Executive Officers
Jacqueline Angell
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (November 2022–present) of Vanguard and of each of the investment companies served by Vanguard. Chief compliance officer (2018–2022) and deputy chief compliance officer (2017–2019) of State Street.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2021–present) and treasurer (2017–2022) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
John Galloway
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (September 2020–present) of each of the investment companies served by Vanguard. Head of Investor Advocacy (February 2020–present) and head of Marketing Strategy and Planning (2017–2020) at Vanguard. Special assistant to the President of the United States (2015).
Ashley Grim
Born in 1984. Principal occupation(s) during the past five years and other experience: treasurer (February 2022–present) of each of the investment companies served by Vanguard. Fund transfer agent controller (2019–2022) and director of Audit Services (2017–2019) at Vanguard. Senior manager (2015–2017) at PriceWaterhouseCoopers (audit and assurance, consulting, and tax services).
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express. Nonexecutive director of the board of National Grid (energy).
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team
Matthew Benchener Thomas M. Rampulla
Joseph Brennan Karin A. Risi
Mortimer J. Buckley Anne E. Robinson
Gregory Davis Michael Rollings
John James Nitin Tandon
Chris D. Mclsaac Lauren Valente

 

Connect with Vanguard®>vanguard.com
Fund Information > 800-662-7447
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Institutional Investor Services > 800-523-1036
Text Telephone for People Who Are Deaf or Hard of Hearing > 800-749-7273
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.
All comparative mutual fund data are from Morningstar, Inc., unless otherwise noted.
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.
Source for Bloomberg indexes: Bloomberg Index Services Limited. Copyright 2023, Bloomberg. All rights reserved.
© 2023 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q510 032023

Annual Report  |  January 31, 2023
Vanguard Global Capital Cycles Fund

 

Contents
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Performance at a Glance
Vanguard Global Capital Cycles Fund returned 13.81% for the 12 months ended January 31, 2023, more than 17 percentage points higher than its performance benchmark, the S&P Global BMI Metals & Mining 25% Weighted Index.
Despite some relief in midsummer and toward the end of the period, it was a volatile, challenging time for financial markets. Early on, inflation across much of the world continued climbing to multidecade highs amid supply-chain bottlenecks, rising energy and food prices, and broader price increases in goods and services. Central banks responded by aggressively tightening monetary policy. Later, it appeared that inflation might have peaked, and central banks began slowing their pace of interest rate hikes.
In this environment, the majority of the sectors the fund invests in had positive returns. Strong stock selection in materials and financials, the two largest sectors, contributed most to the fund’s outperformance. Real estate was the biggest net detractor.
By market, U.S. and U.K. stocks contributed the most to performance, while an underweight allocation to Australia proved a net detractor.
Over the decade ended January 31, 2023, the fund’s average annual return of –0.49% lagged the 0.15% return of its spliced benchmark index.
Market Barometer
  Average Annual Total Returns
Periods Ended January 31, 2023
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) -8.55% 9.66% 9.38%
Russell 2000 Index (Small-caps) -3.38 7.51 5.54
Russell 3000 Index (Broad U.S. market) -8.24 9.51 9.12
FTSE All-World ex US Index (International) -5.39 4.15 1.73
Bonds      
Bloomberg U.S. Aggregate Float Adjusted Index
(Broad taxable market)
-8.40% -2.34% 0.89%
Bloomberg Municipal Bond Index
(Broad tax-exempt market)
-3.25 -0.42 2.07
FTSE Three-Month U.S. Treasury Bill Index 1.87 0.78 1.29
CPI      
Consumer Price Index 6.41% 5.06% 3.83%
1

 

Advisor’s Report
For the 12 months ended January 31, 2023, Vanguard Global Capital Cycles Fund returned 13.81%, net of fees and expenses, outperforming the –3.30% return of the S&P Global BMI Metals & Mining 25% Weighted Index.
The investment environment
Global equities, as measured by the MSCI All Country World Index, declined for the 12-month period as markets were rattled by slowing global economic growth, increased inflation, rising interest rates, and the resurgence of COVID-19 in some countries.
Equities opened the year lower as volatility spiked sharply, driven by rising geopolitical instability and tighter monetary policy enacted to address accelerating inflation. Following Russia’s large-scale military attack on Ukraine, severe economic sanctions largely cut off the Russian economy from global financial markets and limited the ability of the Russian central bank to take counteractive measures.
Global equities fell sharply in the second quarter amid continued elevated volatility as investors grew increasingly concerned about the economic toll of persistent geopolitical instability, soaring inflation, and constrained supply chains. Global equities fell in the third quarter as risk-off sentiment was driven by higher inflation, rising interest rates, geopolitical turmoil, and growing signs of a global economic slowdown. During the third quarter the Federal Reserve hiked its target interest rate by 150 basis points (bps) in an effort
to rein in decades-high inflation, while the European Central Bank ended its negative interest rate policy, raising rates by 125 bps. (A basis point is one-hundredth of a percentage point.)
Stocks rallied in the final months of the period as investors were encouraged by milder inflation, which provided greater scope for some major central banks to slow their pace of interest rate hikes. In contrast, market sentiment was dented by anxiety about tighter central bank policy amid weakening global economic growth and cautious corporate commentary that added to signs of recession. Chinese equities soared after investors grew bullish on China’s economic outlook for 2023 following the government’s abrupt COVID-19 pivot that ended mass testing, lockdowns, and quarantine for international travelers.
The fund’s successes
Both security selection and sector allocation drove relative outperformance in aggregate over the period. Strong security selection within materials (Glencore, Livent), financials (UniCredit, Intact Financial), and industrials (BWX Technologies, Fluor) contributed to performance. An underweight allocation to information technology and an overweight allocation to materials also contributed.
The fund’s largest relative contributors included overweight positions in Glencore (materials) and Schlumberger (energy).
Glencore shares ended the period higher as the U.K.-based mining and commodity
 
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trading company generated record profits on the back of soaring coal prices. We believe the company has everything necessary to benefit from the energy transition as we shift from an energy-intensive economy to a metals-intensive one. Moreover, there will be increased buildout of electricity grids, which will require metals such as copper. The company has communicated a strategy to run down its coal portfolio and use cash flow to reinvest in its portfolio of energy-transition metals. Therefore, we expect the compelling story of environmental, social, and governance (ESG) improvement to expand the pool of potential investors.
Shares of Schlumberger advanced during the period. The U.S.-based oilfield services company reported third-quarter earnings that beat expectations and raised guidance for the rest of 2022 as overseas drilling accelerated following North America’s lead amid tight global supply. Schlumberger changed its name to SLB and rebranded as a technology company to go after more work in the clean-energy space. The company plans to continue operating its legacy oil and gas business while expanding into technologies that will help companies curb emissions of carbon dioxide and methane.
The fund’s shortfalls
Although security selection and sector allocation contributed to relative performance in aggregate, selection within real estate and information technology detracted, as did the fund’s underweight to consumer staples.
The fund’s largest relative detractors included overweight positions in Medical Properties Trust (real estate) and Intel (information technology).
Shares of Medical Properties Trust ended the period lower as higher interest rates and market conditions weighed heavily on health care real estate. The company also faced additional pressure due to concerns about the financial health of its top tenant. We eliminated our position given negative press driving the stock price lower and our belief that there is little opportunity for long-term growth.
Intel shares declined over the period. The chipmaker’s fourth-quarter results missed consensus estimates, driven by lower sales as demand for personal computers retreated from the COVID-19 boom. Management also announced a weaker-than-expected forecast and declined to provide a full-year forecast due to the uncertainty of the current environment. We continue to hold our position as we believe the company has improving business fundamentals at a cheap valuation.
The fund’s positioning and investment strategy
Toward the end of the year, improvements in global supply chains helped ease inflationary pressures, although geopolitical tensions heightened as the war in Ukraine escalated and global trade relations were stressed.
We believe that several of the driving forces behind higher levels of inflation are not transitory but structural. On the goods
3

 

side, this includes increased environmental regulation and the recent efforts of reshoring as opposed to offshoring, which has been amplified by additional political protectionism. On the services side, we are seeing inflation expectations already feeding through to higher wage growth, while lower participation rates post-COVID and overall demographic changes point toward higher service inflation in the future.
Importantly, we do not expect inflation to move higher in a linear manner. Rather, we expect a more volatile inflationary environment with a higher trend over time—and this transition is already underway. However, given current levels, we see signs that annual inflation should slow in the near term due to the global cyclical slowdown over the next three to six months and global easing in supply-chain bottlenecks.
Our framework continues to identify several compelling dislocations in inflation-sensitive companies in traditional energy and metal sectors as well as in financials, particularly insurance and European banks. We also see attractive opportunities in actors of the energy transition, including along the electric vehicle (EV) value chain, in electric utilities, and in energy services.
With regard to energy and metal producers, we believe the global energy transition will require substantial capital spending and infrastructure development through midcentury, dwarfing previous landmark economic stimulus plans. We think the combination of outsized
spending, policy tailwinds, and shifting consumer and investor attitudes will kick-start this new capital cycle. In the first stages, renewable energy, EVs, and battery storage will use large volumes of energy, raw materials, and base metals. Therefore, the demand for these raw materials is set to grow commensurately, requiring additional supply.
Indeed, project pipelines are thin for most base metals following years of underinvestment, and as such we expect market tightness. The metals industry overall has been navigating increased scrutiny from stakeholders on ESG issues as well as shifting investor preference for sustainable returns. These dynamics have hampered a traditional supply response, pointing to structurally higher margins from metals producers.
In financials, we believe European banks have the potential to continue to surprise on the upside, further increasing capital returns to shareholders, thanks to accelerating loan growth, expanding margins, and still-attractive valuations.
Demand for EVs, in the short run, has been hampered by rising prices for certain commodities such as lithium, but we believe the trajectory remains unchanged, and the adoption curve remains below our estimates, which we think should lead to further bottlenecks in battery capacity and equipment.
Utility companies have historically been able to pass on inflation to consumers. However, in Europe, with inflation spiking, the energy crisis ongoing, and a recession
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looming, more regulatory scrutiny is expected, including the potential implementation of a windfall tax. As such, we favor U.S. utilities to their European counterparts and added to American Electric and Exelon this quarter. Longer term, we believe regulators and governments will continue to allow those companies to have similar return structures, as massive investment will be needed, including to modernize the grid.
Keith E. White,
Senior Managing Director
and Equity Portfolio Manager
Wellington Management Company llp
February 10, 2023
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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.
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Six Months Ended January 31, 2023      
Global Capital Cycles Fund Beginning
Account Value
7/31/2022
Ending
Account Value
1/31/2023
Expenses
Paid During
Period
Based on Actual Fund Return $1,000.00 $1,178.30 $2.42
Based on Hypothetical 5% Yearly Return 1,000.00 1,022.99 2.24
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 0.44%. 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 (184/365).
7

 

Global Capital Cycles Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2013, Through January 31, 2023
Initial Investment of $10,000
    Average Annual Total Returns
Periods Ended January 31, 2023
 
    One
Year
Five
Years
Ten
Years
Final Value
of a $10,000
Investment
 Global Capital Cycles Fund 13.81% 6.08% -0.49% $9,525
 Spliced Global Capital Cycles Index -3.30 3.75 0.15 10,151
 MSCI All Country World Index -7.99 5.53 8.24 22,073
Spliced Global Capital Cycles Index: S&P Global Custom Metals and Mining Index through September 25, 2018; S&P Global BMI Metals & Mining 25% Weighted Index thereafter.
See Financial Highlights for dividend and capital gains information.
8

 

Global Capital Cycles Fund
Fund Allocation
As of January 31, 2023
 
United States 27.8%
United Kingdom 26.4
Canada 16.4
China 5.3
Australia 3.8
Japan 3.6
Germany 3.4
Switzerland 2.4
Italy 2.4
Sweden 1.6
Brazil 1.5
Austria 1.5
France 1.4
South Korea 1.0
Other 1.5
The table reflects the fund's investments, except for short-term investments.
9

 

Global Capital Cycles Fund
Financial Statements
Schedule of Investments
As of January 31, 2023
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 (92.0%)
Australia (3.4%)
1 BHP Group Ltd. ADR    409,441    28,722
BHP Group Ltd. (XASX)    677,588    23,731
                      52,453
Austria (1.4%)
2 BAWAG Group AG    336,663    20,855
Brazil (1.4%)
Vale SA Class B ADR  1,154,895    21,573
Canada (15.1%)
Barrick Gold Corp.  8,017,404   156,740
Intact Financial Corp.    270,193    39,198
Endeavour Mining plc    720,255    16,970
Agnico Eagle Mines Ltd.    286,965    16,208
* Foran Mining Corp.    314,757       793
                     229,909
China (4.9%)
* Alibaba Group Holding Ltd.  1,762,644    24,234
Ping An Insurance Group Co. of China Ltd. Class H  2,920,174    22,683
Contemporary Amperex Technology Co. Ltd. Class A    189,139    13,120
* Baidu Inc. Class A    633,893    10,656
* XPeng Inc. Class A    592,432     3,118
                      73,811
France (1.3%)
STMicroelectronics NV    355,632    16,746
Rubis SCA    103,412     2,894
                      19,640
Germany (3.1%)
Bayer AG (Registered)    545,555    33,958
* Hypoport SE     98,728    13,450
                      47,408
Greece (0.6%)
* Public Power Corp. SA  1,080,483     8,608
          Shares Market
Value

($000)
Hong Kong (0.8%)
AIA Group Ltd.  1,092,248    12,351
Italy (2.2%)
UniCredit SpA  1,729,248    33,774
Japan (3.3%)
Panasonic Holdings Corp.  2,446,600    22,688
Mitsubishi UFJ Financial Group Inc.  2,247,800    16,465
T&D Holdings Inc.    711,540    11,389
                      50,542
South Korea (0.9%)
* Coupang Inc. Class A    793,662    13,405
Sweden (1.5%)
SKF AB Class B  1,252,691    22,171
Switzerland (2.2%)
Novartis AG (Registered)    373,666    33,783
United Kingdom (24.3%)
Glencore plc 10,251,133    68,651
Anglo American plc  1,303,992    56,242
1 Rio Tinto plc ADR    567,573    45,037
Unilever plc    811,595    41,310
* Nomad Foods Ltd.  2,169,446    38,594
Standard Chartered plc  2,917,552    24,506
* Haleon plc  6,026,994    24,153
Centamin plc 14,554,379    19,952
* Babcock International Group plc  4,009,566    15,148
* John Wood Group plc  7,774,205    13,629
Serco Group plc  6,226,714    11,215
Fresnillo plc  1,020,765    10,369
                     368,806
United States (25.6%)
American Electric Power Co. Inc.  1,074,552   100,965
BWX Technologies Inc.  1,201,722    73,137
* Enstar Group Ltd.    175,285    42,472
Viper Energy Partners LP  1,212,762    38,505
Schlumberger Ltd.    523,533    29,831
Merck & Co. Inc.    267,474    28,729
10

 

Global Capital Cycles Fund
          Shares Market
Value

($000)
Intel Corp.    920,517    26,014
Exelon Corp.    331,845    14,000
* Diamond Offshore Drilling Inc.  1,165,041    13,351
* Fluor Corp.    318,722    11,713
Mosaic Co.    205,876    10,199
* Metals Acquisition Corp. Warrants Exp. 7/12/26    330,300       233
                     389,149
Total Common Stocks
(Cost $1,157,924)
1,398,238
Temporary Cash Investments (8.5%)
Money Market Fund (8.5%)
3,4 Vanguard Market Liquidity Fund, 4.437% (Cost $128,747)  1,287,611   128,748
Total Investments (100.5%)
(Cost $1,286,671)
  1,526,986
Other Assets and Liabilities—Net (-0.5%)   (6,973)
Net Assets (100%)   1,520,013
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 $24,485,000.
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 January 31, 2023, the aggregate value was $20,855,000, representing 1.4% 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 $25,126,000 was received for securities on loan.
  ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
11

 

Global Capital Cycles Fund
Statement of Assets and Liabilities
As of January 31, 2023
($000s, except shares, footnotes, and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $1,157,924) 1,398,238
Affiliated Issuers (Cost $128,747) 128,748
Total Investments in Securities 1,526,986
Investment in Vanguard 53
Foreign Currency, at Value (Cost $202) 201
Receivables for Investment Securities Sold 27,958
Receivables for Accrued Income 1,748
Receivables for Capital Shares Issued 854
Total Assets 1,557,800
Liabilities  
Due to Custodian 3,464
Payables for Investment Securities Purchased 7,631
Collateral for Securities on Loan 25,126
Payables for Capital Shares Redeemed 634
Payables to Investment Advisor 694
Payables to Vanguard 238
Total Liabilities 37,787
Net Assets 1,520,013
1 Includes $24,485,000 of securities on loan.  

At January 31, 2023, net assets consisted of:

   
Paid-in Capital 3,363,644
Total Distributable Earnings (Loss) (1,843,631)
Net Assets 1,520,013
   
Net Assets  
Applicable to 122,273,792 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
1,520,013
Net Asset Value Per Share $12.43
See accompanying Notes, which are an integral part of the Financial Statements.
12

 

Global Capital Cycles Fund
Statement of Operations
  Year Ended
January 31, 2023
  ($000)
Investment Income  
Income  
Dividends1 48,459
Non-Cash Dividends 5,209
Interest2 722
Securities Lending—Net 135
Total Income 54,525
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 2,037
Performance Adjustment 664
The Vanguard Group—Note C  
Management and Administrative 3,024
Marketing and Distribution 72
Custodian Fees 34
Auditing Fees 27
Shareholders’ Reports 58
Trustees’ Fees and Expenses
Other Expenses 101
Total Expenses 6,017
Expenses Paid Indirectly (1)
Net Expenses 6,016
Net Investment Income 48,509
Realized Net Gain (Loss)  
Investment Securities Sold2,3 104,928
Foreign Currencies (952)
Realized Net Gain (Loss) 103,976
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2,4 17,807
Foreign Currencies 21
Change in Unrealized Appreciation (Depreciation) 17,828
Net Increase (Decrease) in Net Assets Resulting from Operations 170,313
1 Dividends are net of foreign withholding taxes of $2,027,000.
2 Interest income, realized net gain (loss), capital gain distributions received, and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $722,000, $53,000, less than $1,000, and (less than $1,000), respectively. Purchases and sales are for temporary cash investment purposes.
3 Realized Gain (Loss) is net of foreign capital gains taxes of $3,277,000.
4 The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of ($3,105,000).
See accompanying Notes, which are an integral part of the Financial Statements.
13

 

Global Capital Cycles Fund
Statement of Changes in Net Assets
  Year Ended January 31,
  2023
($000)
2022
($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 48,509 43,390
Realized Net Gain (Loss) 103,976 166,516
Change in Unrealized Appreciation (Depreciation) 17,828 41,453
Net Increase (Decrease) in Net Assets Resulting from Operations 170,313 251,359
Distributions    
Total Distributions (44,720) (42,400)
Capital Share Transactions    
Issued 320,924 228,666
Issued in Lieu of Cash Distributions 38,683 36,640
Redeemed (324,685) (296,930)
Net Increase (Decrease) from Capital Share Transactions 34,922 (31,624)
Total Increase (Decrease) 160,515 177,335
Net Assets    
Beginning of Period 1,359,498 1,182,163
End of Period 1,520,013 1,359,498
See accompanying Notes, which are an integral part of the Financial Statements.
14

 

Global Capital Cycles Fund
Financial Highlights
For a Share Outstanding
Throughout Each Period
Year Ended January 31,
2023 2022 2021 2020 2019
Net Asset Value, Beginning of Period $11.28 $9.57 $7.97 $7.62 $10.57
Investment Operations          
Net Investment Income1 .392 .356 .197 .212 .122
Net Realized and Unrealized Gain (Loss) on Investments 1.134 1.715 1.597 .337 (2.858)
Total from Investment Operations 1.526 2.071 1.794 .549 (2.736)
Distributions          
Dividends from Net Investment Income (.376) (.361) (.194) (.199) (.214)
Distributions from Realized Capital Gains
Total Distributions (.376) (.361) (.194) (.199) (.214)
Net Asset Value, End of Period $12.43 $11.28 $9.57 $7.97 $7.62
Total Return2 13.81% 21.74% 22.63% 7.11% -26.17%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $1,520 $1,359 $1,182 $1,212 $1,399
Ratio of Total Expenses to Average Net Assets3 0.43%4 0.36% 0.35% 0.38% 0.33%
Ratio of Net Investment Income to Average Net Assets 3.45% 3.28% 2.43% 2.68% 1.38%
Portfolio Turnover Rate 63% 57% 70% 56% 110%
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 0.05%, (0.01%), (0.03%), 0.00%, and (0.04%).
4 The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.43%.
See accompanying Notes, which are an integral part of the Financial Statements.
15

 

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 by methods deemed by the valuation designee to represent fair value and subject to oversight by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
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 virtually all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
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.
16

 

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 year ended January 31, 2023, the fund did not utilize the credit facilities or the Interfund Lending Program.
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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. Amounts related to these reclaims are recorded when there are no significant uncertainties as to the ‎ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of ‎payment. Such tax reclaims and related professional fees, if any, are included in dividend income and other expenses, respectively.
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 year ended January 31, 2023, 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 $664,000 (0.05%) 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 January 31, 2023, the fund had contributed to Vanguard capital in the amount of $53,000, 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.  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 year ended January 31, 2023, custodian fee offset arrangements reduced the fund’s expenses by $1,000 (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.).
18

 

Global Capital Cycles Fund
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 January 31, 2023, 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 640,631 640,631
Common Stocks—Other 125,758 631,849 757,607
Temporary Cash Investments 128,748 128,748
Total 895,137 631,849 1,526,986
F.  Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for applicable foreign currency transactions and tax expense on capital gains were reclassified between the individual components of total distributable earnings (loss).
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the deferral of losses from wash sales; and the recognition of unrealized gains from passive foreign investment companies. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
  Amount
($000)
Undistributed Ordinary Income 845
Undistributed Long-Term Gains
Net Unrealized Gains (Losses) 238,916
Capital Loss Carryforwards (2,084,162)
Qualified Late-Year Losses
Other Temporary Differences 770
Total (1,843,631)
19

 

Global Capital Cycles Fund
The tax character of distributions paid was as follows:
  Year Ended January 31,
  2023
Amount
($000)
2022
Amount
($000)
Ordinary Income* 44,720 42,400
Long-Term Capital Gains
Total 44,720 42,400
* Includes short-term capital gains, if any.
As of January 31, 2023, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 1,288,098
Gross Unrealized Appreciation 282,981
Gross Unrealized Depreciation (44,093)
Net Unrealized Appreciation (Depreciation) 238,888
G.  During the year ended January 31, 2023, the fund purchased $846,668,000 of investment securities and sold $885,743,000 of investment securities, other than temporary cash investments.
H.  Capital shares issued and redeemed were:
  Year Ended January 31,  
  2023
Shares
(000)
  2022
Shares
(000)
     
Issued 27,145   21,067
Issued in Lieu of Cash Distributions 3,366   3,333
Redeemed (28,764)   (27,397)
Net Increase (Decrease) in Shares Outstanding 1,747   (2,997)
I.  Management has determined that no events or transactions occurred subsequent to January 31, 2023, that would require recognition or disclosure in these financial statements.
20

 

Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Global Capital Cycles Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Vanguard Global Capital Cycles Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the "Fund") as of January 31, 2023, the related statement of operations for the year ended January 31, 2023, the statement of changes in net assets for each of the two years in the period ended January 31, 2023, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2023 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2023, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended January 31, 2023 and the financial highlights for each of the five years in the period ended January 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2023 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 23, 2023
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
21

 


Tax information (unaudited)
For corporate shareholders, 16.2%, or if subsequently determined to be different, the maximum percentage allowable by law, of ordinary income (dividend income plus short-term gains, if any) for the fiscal year qualified for the dividends-received deduction.
The fund hereby designates $37,846,000, or if subsequently determined to be different, the maximum amount allowable by law, as qualified dividend income for individual shareholders for the fiscal year.
The fund hereby designates $191,000, or if subsequently determined to be different, the maximum amount allowable by law, of interest earned from obligations of the U.S. government which is generally exempt from state income tax.
The fund designates to shareholders foreign source income of $47,029,000 and foreign taxes paid of $6,010,000, or if subsequently determined to be different, the maximum amounts allowable by law. Form 1099-DIV reports calendar-year amounts that can be included on the income tax return of shareholders.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 206 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018–present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Member of the board of governors of the Investment Company Institute and the board of governors of FINRA. Trustee and vice chair of The Shipley School.
Independent Trustees
Tara Bunch
Born in 1962. Trustee since November 2021. Principal occupation(s) during the past five years and other experience: head of global operations at Airbnb (2020–present). Vice president of AppleCare (2012–2020). Member of the board of directors of Out & Equal, the advisory board of the University of California, Berkeley School of Engineering, and the advisory board of Santa Clara University’s Leavey School of Business.
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Member of the board of directors of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, Roberts Wesleyan College, and the Rochester Philharmonic Orchestra. Trustee of the University of Rochester.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief ‎operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of ‎Hillenbrand, Inc. (global industrial company). Director of the V Foundation. Member of the advisory council for the College of Arts and ‎Letters at the University of Notre Dame. Chairman of the board of Saint Anselm College.
 
1 Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

 

Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer ‎‎(retired 2020) and vice president (retired 2020) of the University of Notre Dame. Chair of the board of Catholic Investment Services, Inc. ‎‎(investment advisors). Member of the board of superintendence of the Institute for the Works of Religion, the Notre Dame 403(b) Investment ‎Committee, and the board of directors of Paxos Trust Company (finance).
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer of Purposeful (advisory firm for CEOs and C-level executives; 2021–present). Board chair (2020), chief executive officer (2011–2020), and president (2010–2019) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of the Guardian Life Insurance Company of America. Director of DuPont. Member of the board of the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, and the NewYork-Presbyterian Hospital.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and partner of HighVista Strategies (private investment firm). Member of the board of RIT Capital Partners (investment firm).
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–‎‎2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of ‎financial regulation for the State of Maryland. Colin W. Brown Distinguished Professor of the Practice of Law, Duke Law School (2021–‎present); Rubenstein Fellow, Duke University (2017–2020); Distinguished Fellow of the Global Financial Markets Center, Duke Law School ‎‎(2020–2022); and Senior Fellow, Duke Center on Risk (2020–present). Partner of Kaya Corporation Ltd. (climate policy advisory services). ‎Member of the board of directors of Arcadia Corporation (energy solution technology).
David Thomas
Born in 1956. Trustee since July 2021. Principal occupation(s) during the past five years and other experience: president of Morehouse College (2018–present). Professor of business administration, emeritus at Harvard University (2017–2018). Dean (2011–2016) and professor of management (2016–2017) at the Georgetown University McDonough School of Business. Director of DTE Energy Company. Trustee of Common Fund.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Member of the BMW Group Mobility Council.
Executive Officers
Jacqueline Angell
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer ‎‎(November 2022–present) of Vanguard and of each of the investment companies served by Vanguard. Chief compliance officer (2018–2022) ‎and deputy chief compliance officer (2017–2019) of State Street.

 

Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2021–present) and treasurer (2017–2022) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
John Galloway
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (September 2020–present) of each of the investment companies served by Vanguard. Head of Investor Advocacy (February 2020–present) and head of Marketing Strategy and Planning (2017–2020) at Vanguard. Special assistant to the President of the United States (2015).
Ashley Grim
Born in 1984. Principal occupation(s) during the past five years and other experience: treasurer (February 2022–present) of each of the ‎investment companies served by Vanguard. Fund transfer agent controller (2019–2022) and director of Audit Services (2017–2019) at ‎Vanguard. Senior manager (2015–2017) at PriceWaterhouseCoopers (audit and assurance, consulting, and tax services).
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express. Nonexecutive director of the board of National Grid (energy).
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team
Matthew Benchener Thomas M. Rampulla
Joseph Brennan Karin A. Risi
Mortimer J. Buckley Anne E. Robinson
Gregory Davis Michael Rollings
John James Nitin Tandon
Chris D. McIsaac Lauren Valente

 

Connect with Vanguard®>vanguard.com
Fund Information > 800-662-7447
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Institutional Investor Services > 800-523-1036
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Who Are Deaf or Hard of Hearing > 800-749-7273
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.
All comparative mutual fund data are from Morningstar, Inc., unless otherwise noted.
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.
Source for Bloomberg indexes: Bloomberg Index Services Limited. Copyright 2023, Bloomberg. All rights reserved.
© 2023 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q530 032023

Annual Report   |   January 31, 2023
Vanguard Health Care Fund

 

Contents
Your Fund’s Performance at a Glance

1
Advisor's Report

2
About Your Fund’s Expenses

5
Performance Summary

7
Financial Statements

9
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Performance at a Glance
For the 12 months ended January 31, 2023, Vanguard Health Care Fund returned 6.57% for Investor Shares and 6.63% for Admiral Shares. These results outpaced the 1.13% return of the fund’s benchmark index.
Despite some relief in midsummer and toward the end of the period, it was a volatile, challenging time for financial markets. Early on, inflation readings across much of the world continued climbing to multidecade highs amid supply chain bottlenecks, rising energy and food prices, and broader price increases in goods and services. Central banks responded by aggressively tightening monetary policy. Later, it appeared that inflation might have peaked, and central banks began slowing their pace of interest rate hikes.
Sticky inflation, dramatic rate hikes, and fears of a recession weighed heavily on sentiment in the stock market. Health care was one of the few sectors that posted positive returns for the 12 months.
The fund’s performance relative to the benchmark was bolstered primarily by stock selection, most notably in biotechnology and pharmaceuticals. The fund’s allocations among subsectors, especially an overweight to biotechnology, also boosted relative performance.
Market Barometer
  Average Annual Total Returns
Periods Ended January 31, 2023
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) -8.55% 9.66% 9.38%
Russell 2000 Index (Small-caps) -3.38 7.51 5.54
Russell 3000 Index (Broad U.S. market) -8.24 9.51 9.12
FTSE All-World ex US Index (International) -5.39 4.15 1.73
Bonds      
Bloomberg U.S. Aggregate Float Adjusted Index
(Broad taxable market)
-8.40% -2.34% 0.89%
Bloomberg Municipal Bond Index
(Broad tax-exempt market)
-3.25 -0.42 2.07
FTSE Three-Month U.S. Treasury Bill Index 1.87 0.78 1.29
CPI      
Consumer Price Index 6.41% 5.06% 3.83%
1

 

Advisor’s Report
For the 12 months ended January 31, 2023, Vanguard Health Care Fund returned 6.57% for Investor Shares and 6.63% for Admiral Shares. The fund outperformed the 1.13% return of its benchmark index and the –1.67% average return of its Lipper peer fund group.
The investment environment
We view the health care sector through a custom lens of subsectors. We combine biotechnology and pharmaceuticals and think of them in terms of capitalization: biopharma small-cap, biopharma mid-cap, and biopharma large-cap. The other subsectors are health care services and medical technology.
Biopharma large-cap was the top-performing subsector in the benchmark during the 12 months, followed by health care services and biopharma mid-cap. Medical technology lagged the broader health care sector. Small-cap biopharmaceuticals are not meaningfully represented in the benchmark.
Our successes
Stock selection contributed positively to the fund’s performance, particularly in the biopharma large-cap and biopharma mid-cap subsectors. From an allocation perspective, our underweight to the underperforming medical technology space contributed to relative performance, as did our overweight to biopharma mid-cap.
Eli Lilly, a biopharma large-cap company, was the fund’s top relative performer.
Shares rose after it received FDA approval for tirzepatide, for the treatment of type 2 diabetes. Compelling pivotal data for non-diabetic obesity also underscored the drug’s long-term value. Furthermore, positive results in the phase 3 trial for an Alzheimer’s drug manufactured by Eisai raised hopes for other anti-amyloid drugs, including Eli Lilly’s donanemab.
Another top contributor was Alnylam Pharmaceuticals, a biopharma large-cap company. Its shares rose after Onpattro—the company’s RNA interference therapy that reduces amyloid deposits in various tissues and organs—met the main goal of a late-stage trial in patients with a form of heart disease. This paves the way for the company to seek wider approval from U.S. regulators.
Not owning biopharma large-cap company Roche Holding AG was also among the top relative contributors. Roche had two research and development disappointments: the failed phase 3 results of its Alzheimer’s studies for gantenerumab, and results from tiragolumab for non-small cell lung cancer treatment that failed to meet the primary co-endpoint of progression-free survival.
Our shortfalls
Stock selection was weakest within the biopharma small-cap subsector. From an allocation perspective, our underweight to the biopharma large-cap space detracted from relative performance.
Not owning Merck & Co., a biopharma large-cap company, for most of the period
 
2

 

was the largest detractor. Its shares rose on the back of higher sales guidance for leading immunotherapy cancer treatment Keytruda and human papillomavirus vaccine Gardasil, in addition to R&D success for sotatercept—a drug for pulmonary arterial hypertension that was added to Merck’s pipeline through its acquisition of Acceleron Pharma. The study achieved its primary endpoint of showing significant improvement in exercise capacity.
Another top detractor was not owning Novo Nordisk, a biopharma large-cap company. Shares rose after the company announced strong third-quarter profits driven primarily by demand for the company’s diabetes treatment Ozempic. Additionally, the company made progress on alleviating supply disruptions with its obesity drug Wegovy, and management expressed confidence in increasing production capacity in 2023.
Viatris—a biopharma mid-cap company formed through the combination of Mylan and Pfizer’s generics business, Upjohn—was another notable detractor. Shares declined after the company reported worse-than-expected topline results for the last quarter of 2021 and issued guidance below estimates.
Our additions and eliminations
We initiated a position in Merck, as we are becoming increasingly optimistic that the company will be able to manage the loss of exclusivity of Keytruda later this decade. We are starting to see improved growth security in Keytruda and Gardasil
and are encouraged by progress in the oncology pipeline and the company’s competitive position in pneumococcal conjugate vaccines.
We also initiated a position in Abbott Laboratories, a diversified medical technology company, as we are finding an attractive risk/reward opportunity following the stock’s recent underperformance. The company has faced short-term headwinds, including declines in COVID-19 testing demand and challenges following a baby-formula product recall. However, we are encouraged by its fundamentals, which are supported by a strong balance sheet and its portfolio of diversified franchises such as Libre, the company’s continuous glucose monitoring system for diabetes.
We eliminated positions in Bristol-Myers Squibb and Incyte. Both face patent expirations of their lead franchise this decade and need more significant new product innovation to offset these challenges.
The fund’s characteristics
At the fiscal year’s end, about 27% of the fund’s assets were in non-U.S. investments, a level that has remained fairly stable in recent years. Our non-U.S. holdings were primarily companies domiciled in Japan, the United Kingdom, Switzerland, Belgium, and Denmark, many of which operate globally. We believe this strategy provides diversification for shareholders over the long term.
The fund held 105 companies across all subsectors of health care as of the end of
3

 

the period, reflecting a slight decrease from the 108 equity names we held a year ago. The fund’s 10 largest holdings represented a significant 41% of total assets.
The fund’s positioning and outlook
We have a positive outlook across the health care opportunity set. Groundbreaking innovation, supportive valuations, and business models that are positioned to show resilience through the cycle should benefit long-term investors in this sector. Within biopharma, we anticipate continued developments in areas such as Alzheimer’s disease, metabolic diseases, and cancer, as well as companies discovering drugs using new modalities such as messenger RNA, RNA interference, and bispecific antibodies.
Innovation is also accelerating across medical technology, which should lead to strong growth. This includes advances in new diabetes and cardiovascular devices and novel tools that serve the life sciences industry. Lastly, health care services companies remain well-positioned to help solve the societal challenge of rising health care costs. Some will benefit from the ongoing transition from a fee-for-service to a fee-for-value care system. We expect the strength of managed care business models to continue to shine. We are finding attractive opportunities among companies focused on improving patient outcomes while reining in costs.
Jean M. Hynes, CFA
Senior Managing Director and
Portfolio Manager
Wellington Management Company llp
February 10, 2023
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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.
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Six Months Ended January 31, 2023      
  Beginning
Account Value
7/31/2022
Ending
Account Value
1/31/2023
Expenses
Paid During
Period
Based on Actual Fund Return      
Health Care Fund      
Investor Shares $1,000.00 $1,038.90 $1.80
Admiral™ Shares 1,000.00 1,039.20 1.54
Based on Hypothetical 5% Yearly Return      
Health Care Fund      
Investor Shares $1,000.00 $1,023.44 $1.79
Admiral Shares 1,000.00 1,023.69 1.53
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 0.35% for Investor Shares and 0.30% 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 (184/365).
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Health Care Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: January 31, 2013, Through January 31, 2023
Initial Investment of $10,000
    Average Annual Total Returns
Periods Ended January 31, 2023
 
    One
Year
Five
Years
Ten
Years
Final Value
of a $10,000
Investment
 Health Care Fund Investor Shares 6.57% 8.50% 12.85% $33,484
 MSCI All Country World Index Health Care Index 1.13 8.29 10.87 28,067
 Dow Jones U.S. Total Stock Market Float Adjusted Index -8.42 8.99 12.19 31,581
       
    One
Year
Five
Years
Ten
Years
Final Value
of a $50,000
Investment
Health Care Fund Admiral Shares 6.63% 8.56% 12.90% $168,254
MSCI All Country World Index Health Care Index 1.13 8.29 10.87 140,334
Dow Jones U.S. Total Stock Market Float Adjusted Index -8.42 8.99 12.19 157,905
See Financial Highlights for dividend and capital gains information.
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Health Care Fund
Fund Allocation
As of January 31, 2023
United States 72.2%
Japan 8.8
United Kingdom 6.9
Switzerland 5.3
Belgium 3.1
Denmark 2.2
China 1.1
Other 0.4
The table reflects the fund’s investments, except for short-term investments.
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Health Care Fund
Financial Statements
Schedule of Investments
As of January 31, 2023
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 (98.3%)
Belgium (3.1%)
1 UCB SA 10,923,125    896,839
* Argenx SE  1,339,326    510,131
* Galapagos NV  1,175,458     52,024
       1,458,994
Brazil (0.0%)
*,2 Hapvida Participacoes e Investimentos SA    8,909,471      9,039
China (1.1%)
2 WuXi AppTec Co. Ltd. Class H  9,838,416    127,841
* Legend Biotech Corp. ADR  1,483,204     74,902
* Zai Lab Ltd. 14,229,400     59,519
  Yifeng Pharmacy Chain Co. Ltd. Class A  6,945,794     58,463
*,2 Wuxi Biologics Cayman Inc.  6,756,200     56,417
* Zai Lab Ltd. ADR  1,085,794     45,755
  Shandong Weigao Group Medical Polymer Co. Ltd. Class H 24,872,000     41,347
*,2 Remegen Co. Ltd. Class H  4,397,500     35,558
  Shenzhen Mindray Bio-Medical Electronics Co. Ltd. Class A (XSHE)    452,517     22,372
*,2 Everest Medicines Ltd.  2,139,500      6,836
         529,010
Denmark (2.2%)
* Genmab A/S  2,088,852    818,614
* Ascendis Pharma A/S ADR    942,809    116,984
*,3 Genmab A/S ADR  2,285,855     89,491
       1,025,089
Italy (0.2%)
  DiaSorin SpA    552,359     71,906
  Amplifon SpA  1,439,109     39,738
         111,644
Japan (8.6%)
  Daiichi Sankyo Co. Ltd. 43,891,190  1,378,488
1 Eisai Co. Ltd. 18,623,177  1,152,216
  Chugai Pharmaceutical Co. Ltd. 17,516,900    454,127
    Shares Market
Value

($000)
  Ono Pharmaceutical Co. Ltd. 19,628,460    425,912
  Astellas Pharma Inc. 22,277,204    327,923
  Terumo Corp.  6,976,400