-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ThqW2NsDnN3p2Cp7REw3+zYoREF3cqBYDa3YB+Q6AWRLsgi8BOwTrZhFm3IV3pZ8 lAiitOhNzkb5+yjyDK9SAA== 0000893220-94-000100.txt : 19940218 0000893220-94-000100.hdr.sgml : 19940218 ACCESSION NUMBER: 0000893220-94-000100 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931130 FILED AS OF DATE: 19940217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD NEW JERSEY TAX FREE FUND CENTRAL INDEX KEY: 0000821404 STANDARD INDUSTRIAL CLASSIFICATION: FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: 40 SEC FILE NUMBER: 811-05340 FILM NUMBER: 94510469 BUSINESS ADDRESS: STREET 1: 1300 MORRIS DR STREET 2: PO BOX 2600 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 2156691000 N-30D 1 VANGUARDS ANNUAL REPORT FOR THE NEW JERSEY FUND 1 VANGUARD NEW JERSEY TAX-FREE FUND ANNUAL REPORT 1993 [PHOTO] 2 A BRAVE NEW WORLD FOR INVESTING With the clarity of hindsight, we can now see that the past two decades composed one of the great cycles in the history of the financial markets, as reflected in the chart below. * During the 1973-1982 decade, the nominal total returns (capital change plus income) of stocks and bonds averaged only about +6% per year; cash reserves averaged more than +8% annually. However, high inflation rates, averaging 8.7% annually, devastated these nominal results. Real returns (nominal returns less the inflation rate) for each of these three major asset classes were actually negative. * During the 1983-1992 decade, quite the opposite situation prevailed. Nominal returns for stocks and bonds were close to their highest levels in history and forged well into double-digit territory. To make a good investment environment even better, inflation was tame (averaging 3.8% annually), and real returns were solidly positive. [A TALE OF TWO DECADES BAR GRAPH -- SEE EDGAR APPENDIX] This sharp contrast provides us with perspective for the decade that will end in the year 2002. Some investors will fear a recurrence of the returns of the first decade, while others will hope for a recurrence of the second; most will likely anticipate something in between. Whatever the case, there are two essential elements involved in considering your investment program in the light of today's circumstances. First, the yield of each investment class at the start of a decade has had an important relationship to its future return. Yields were low when 1973 began, high when 1983 began, and are again low today. In fact, current income yields are remarkably close to the levels of 20 years ago, as shown in the following table.
INCOME YIELDS (January 1) ------------------------------------------------- 1973 1983 1993 (11/30) - ------------------------------------------------------------------------------ STOCKS 2.7% 4.9% 2.7% BONDS 5.8 10.7 6.0 RESERVES 3.8 10.5 3.1 - ------------------------------------------------------------------------------
But there is a second important element to consider: inflation. It got progressively worse during most of the first decade, but got progressively better in the second.
------------------------------------------------- 1973 1981 1993 (11/30) - ------------------------------------------------------------------------------ INFLATION 3.4% 12.4% 2.7% - ------------------------------------------------------------------------------
Today's low yield levels suggest that more modest nominal returns are in prospect for the coming decade than in the 1980s; indeed, returns could gravitate (Please turn to inside back cover) - ------------------------------------------------------------------------------ VANGUARD NEW JERSEY TAX-FREE FUND OFFERS TWO PORTFOLIOS THAT SEEK TO PROVIDE A HIGH LEVEL OF INCOME THAT IS EXEMPT FROM FEDERAL AS WELL AS NEW JERSEY STATE PERSONAL INCOME TAXES. THE INSURED LONG-TERM PORTFOLIO INVESTS PRIMARILY IN INSURED LONG-TERM MUNICIPAL BONDS. THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE ALONG WITH REASONABLE CURRENT INCOME. 3 CHAIRMAN'S LETTER [PHOTO] DEAR SHAREHOLDER: The decline in interest rates continued--and indeed accelerated--during the twelve months ended November 30, 1993, the eighth fiscal year of the Vanguard State Tax-Free Funds. Lower yields pushed the prices of long-term tax-exempt bonds higher, and the net asset values of our Insured Long-Term Portfolios benefited accordingly. As rates fell, however, interest income was reduced, with the most immediate impact felt in our Money Market Portfolios. Reflecting the low-interest-rate environment that prevailed over the past twelve months, our Money Market Portfolios provided returns that were modest in an absolute sense, albeit comfortably above the returns of their respective competitive benchmarks. The total returns (capital change plus income) of our Insured Long-Term Portfolios were exemplary, surpassing even the excellent results that we achieved in our prior fiscal year. It is difficult to imagine a more beneficial two-year stretch for investors in long-term bonds. In any event, here are the Portfolio highlights for the past twelve months: * THE STATE MONEY MARKET PORTFOLIOS--provided total returns of about +2.4% . . . with declining money market rates for yet another year, Portfolio yields ended the period at lower levels than where they began, hovering in the area of 2.3% . . . net asset values, of course, remained at $1.00 per share. * THE STATE INSURED LONG-TERM PORTFOLIOS--enjoyed another outstanding year "across the board," as each Portfolio turned in a double-digit return ranging from +12% to +13% . . . current yields are at their lowest levels in our Funds' (admittedly rather short) history. The detailed results for each of our State Tax-Free Portfolios, including per share net asset values, dividends and capital gains distributions for the fiscal year, as well as current yields are presented at the end of this letter. The following table summarizes the returns for our State Insured Long-Term Portfolios:
- ------------------------------------------------------------------ Investment Returns Twelve Months Ended November 30, 1993 % of Total Insured Long-Term --------------------------- Return From Portfolio Income Capital Total Capital - ------------------------------------------------------------------ CALIFORNIA +5.8% +5.7% +11.5% 49% NEW YORK +6.0 +6.4 +12.4 52 PENNSYLVANIA +6.1 +5.8 +11.9 49 NEW JERSEY +5.9 +6.6 +12.5 52 OHIO +5.7 +6.3 +12.0 52 FLORIDA +5.5 +6.9 +12.4 56 - ------------------------------------------------------------------
In last year's Annual Report, I called special attention to the substantial capital component (appreciation in net asset value per share) of the total returns on our State Insured Long-Term Portfolios. My purpose in doing so at that time was to advise investors that it seemed unreasonable to expect a recurrence of these capital returns in fiscal 1993. As shown in the table, this year the role of capital appreciation in our Portfolios' results turned out to be even more dramatic, accounting on balance for some 50% of our total returns. (continued) 1 4 [MONTH-END YIELDS CHART -- SEE EDGAR APPENDIX] Although my cautionary words one year ago could hardly have been further off the mark, I nonetheless would remind shareholders that capital returns of the magnitude shown in the preceding table simply cannot be taken for granted. Indeed, with long-term interest rates at their lowest levels in two decades, now is a perfect opportunity to remind investors that, should rates reverse direction and move higher, "capital reward" will inevitably translate to "capital penalty" for each of our six Insured Long-Term Portfolios. The excellent absolute returns for all of our Insured Long-Term Portfolios in fiscal 1993 come on top of the double-digit returns earned in the prior fiscal year. The chart at the top of the facing page illustrates the results of the New Jersey Insured Long-Term Portfolio since its inception in February 1988, compared with the results of the two most appropriate available benchmarks: the unmanaged Lehman Municipal Bond Index and the average New Jersey municipal fund. Our returns have been somewhat better than those of the average competitor and the unmanaged Index. I should also note that the New Jersey Money Market Portfolio has enjoyed fine relative results since its inception in February 1988, achieving a cumulative return of +28.8% versus +28.2% for its average competitor (+4.5% versus +4.4% annually). * THE FISCAL YEAR IN REVIEW Our 1993 fiscal year was the sixth consecutive year of favorable markets--and the third consecutive year of double-digit returns-- for long-term bonds. Lower yields drove up the prices of municipal, corporate, and U.S. Treasury bonds alike. Treasury bonds registered the largest rate declines and garnered the greatest price appreciation, gaining some +17% for the year. Over the same period, yields on high-grade, long-term, tax-exempt bonds fell 0.70% (70 "basis points"), from 6.2% to 5.5%, resulting in a price increase of +10%. Compared to the sharp decline in long-term rates over the past twelve months, the drop in short-term tax-exempt rates was fairly muted. From the 2.7% level at the outset of the fiscal year, yields on high-grade (MIG 1) municipal notes fell to 2.0% in January 1993, climbed to 2.6% at the end of July, and closed the year at 2.4%. The consensus holds that the rate decline is based on two fundamental factors. First, the U.S. economy remains sluggish, unable to provide the typical post-recession snapback that investors have come to expect. Second, and perhaps more importantly, there is continuing evidence that inflation remains well under control. The U.S. consumer price index (CPI) increased 2.7% over the past twelve months, compared to 3.0% during the prior twelve-month period. As a result, despite the sharp decline in interest rates, "real" yields (nominal yields less the inflation rate) on long-term bonds remain at healthy levels. The chart to the left provides a striking illustration of how precipitous the decline in interest rates has been over the past four years, with nearly 2 5 [CUMULATIVE PERFORMANCE CHART -- SEE EDGAR APPENDIX]
Average Annual Total Returns--Periods Ended November 30, 1993 - -------------------------------------------------------------------------------------- Since 1 Year 5 Years Inception* - -------------------------------------------------------------------------------------- VANGUARD NJ INSURED LONG-TERM +12.53% +10.29% +9.87% AVERAGE NJ MUNICIPAL FUND +11.72 + 9.88 +9.37 LEHMAN MUNICIPAL BOND INDEX +11.08 +10.01 +9.42
* Inception, February 3, 1988. Competitive performance begins on January 31, 1988. Note: Past performance is not predictive of future performance. nearly all of the decline coming during the final three years. The yield on high-grade, long-term municipal bonds fell from 7.0% on November 30, 1989, to 5.5% on November 30, 1993. For short-term tax-exempt rates, the decline during the same period was more pronounced, with the yield on high-grade notes falling on balance from 5.9% to 2.4%. As a result of this disparity in rate declines, the "spread" of the long rate over the short rate has widened from 110 basis points at the beginning of the period to 310 basis points at the end. This widening reflects a very "steep" yield curve, allowing fixed-income investors to earn a substantial income premium by extending the maturity of their bond holdings. It should go without saying that each step out in length of maturity brings with it additional price volatility. * THE ADVANTAGE OF TAX-EXEMPT INCOME In each year's Annual Report, we present our customary table illustrating the advantage of tax-exempt investments versus taxable investments, after adjusting for the effect of Federal taxes at the maximum marginal rate on income payments. Here are the results of the comparison at the end of fiscal 1993:
- ------------------------------------------------------------------------------------ Illustration of Income on Hypothetical $100,000 Investment -------------------------------- Long-Term Short-Term - ------------------------------------------------------------------------------------ TAXABLE GROSS INCOME $6,300 $3,200 LESS TAXES (39.6%) (2,500) (1,300) - ------------------------------------------------------------------------------------ NET AFTER-TAX INCOME $3,800 $1,900 TAX-EXEMPT INCOME 5,500 2,400 - ------------------------------------------------------------------------------------ TAX-EXEMPT ADVANTAGE $1,700 $ 500 - ------------------------------------------------------------------------------------
Table assumes current yields (as of November 30, 1993) of 6.3% for U.S. Treasury bonds, 3.2% for Treasury bills, 5.5% for long-term municipals, and 2.4% for short-term municipals. The illustration is not intended to represent future results. The advantage spelled out in the table--a 45% increase in after-tax income for the long-term investor and a 26% increase for the short-term investor--strongly suggests that investors who are taxed at the highest marginal rates should consider tax-exempt alternatives for the fixed-income 3 6 portion of their overall investment portfolio. (I should add that both the interest earned on our State Tax-Free Portfolios and the interest earned on U.S. Treasury obligations are exempt from taxes at the state level.) As I noted earlier, the decline in yields on U.S. Treasury bonds has been significantly larger than that on tax-exempt bonds. This divergence is paradoxical considering that it comes just as the maximum marginal federal tax rate has been raised from 31% to 39.6%--the highest rate since 1986. This should mean that the spread between taxable and tax-exempt rates would widen; instead, it has narrowed for long-term investors and remained about the same for short-term investors. To be sure, even the highest quality insured state municipal bond cannot quite match the creditworthiness of a U.S. Treasury bond, and long-term municipal bonds are usually callable after 10 years, a disadvantage not shared by Treasury securities. So, the yield comparison has a moderate structural bias in favor of municipals. But the yield differential illustrated in the table is hardly "moderate"--it is more like "day and night." Suffice it to say that the ability of top-tax-bracket investors to earn substantially more after-tax income with only a marginal sacrifice in quality is unlikely to persist indefinitely. It is probably fair to say that relative values in tax-exempt bonds are as great on a sustained basis as they have been for two decades. * A PERSPECTIVE ON TODAY'S INTEREST RATE ENVIRONMENT The aggregate assets of all municipal bond mutual funds now total some $350 billion, and the funds are now among the largest buyers and holders of tax-exempt securities. While, like all mutual funds, our State Insured Tax-Free Portfolios promise "liquidity on demand" to shareholders, it must be clear that providing this liquidity depends to a degree on an orderly liquidation pattern by investors. With the exception of the industry's experience during 1987's sharp dip in long-term bond prices, resulting from the upward spikes in interest rates in April and May of that year, the industry's handling of redemptions has been flawless, and daily liquidity has been maintained without impacting the marketplace. (Given the very short maturities of money market instruments, liquidity is much less of a concern in our State Money Market Portfolios.) And yet, with rates having come down so far and so fast, there is always the risk of a sharp rebound. When that happens, investors who have purchased municipal bond funds for the long term should not be concerned. However, there appears to be an active body of short-term speculators who move their money from long-term to short-term bonds at the proverbial drop of a hat. You should know that at Vanguard we do our best to exclude these speculators from our funds, by rigorously limiting the frequency of inter-fund exchanges and by refusing to accept business from known "market timers." If you are an investor who likes to speculate on interest rate changes, I urge you to move your assets to one of our many competent competitors. If you are an investor who will respond with fright to any kind of reversal of the past five year's rise in bond prices, I urge you to shorten your maturity profile by, for example, moving a portion of your assets from the more volatile Insured Long-Term Portfolio for your state to our corresponding Money Market Portfolio (available in all states but New York and Florida, in which case the Money Market Portfolio of Vanguard Municipal Bond Fund might be selected). If you are a long-term investor--content that your needs for capital stability (with commensurate income volatility) in our Money Market Portfolios and for income stability (with commensurate capital volatility) in our Insured Long-Term Portfolios are being met--I urge you, once again, to "stay the course." * IN SUMMARY As I write this letter, the combined assets of the ten Vanguard State Tax-Free Portfolios are approaching the $8 billion mark, up some 30% in just one year. This staggering growth is a testament, we believe, to an ever-increasing understanding among investors 4 7 that, all else being equal, costs will "carry the day." With the yield on the average state tax-exempt bond fund at 4.3%, and with 102 of 137 state tax-exempt money market funds now yielding less than 2.0%, costs will be an even more critical determinant of the top-performing funds. This is precisely the kind of environment in which the Vanguard State Tax-Free Portfolios should thrive. While the average competitive state tax-free portfolio charges annual fees at the rate of 0.68% of average net assets, the expense ratio for our Portfolios, at 0.21%, is just a fraction of this amount. For a money market portfolio with a gross yield of 2.0%, the expenses of the average competitor would consume nearly 35% of its interest income; Vanguard's expenses would consume but 11%. It is hard to imagine that intelligent investors could be attracted to a fund with such a built-in yield disadvantage. In closing, we believe that, whatever the future course of interest rates, our State Tax-Free Portfolios will provide returns that generally exceed those of their respective competitors. Sincerely, /S/ JOHN C. BOGLE - --------------------- John C. Bogle Chairman of the Board December 13, 1993 Note: Mutual fund data from Lipper Analytical Services, Inc. A WORD ABOUT CAPITAL GAINS DISTRIBUTIONS You may recall that, during the rising bond markets of each of the past three years, some of our Insured Long-Term Portfolios realized modest capital gains. And, it will probably not surprise you to know that each Portfolio realized capital gains in 1993. These amounts must, under Federal tax regulations, be distributed to shareholders of our Portfolios as taxable capital gains. I want to emphasize that it is not our objective to realize capital gains; rather, these gains are a by-product of a number of factors, including, most importantly, sharply rising municipal bond prices, bonds that are called or refunded, and limited portfolio strategy shifts to capitalize on the relative valuations of different market sectors. 5 8 AVERAGE ANNUAL TOTAL RETURNS THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER 30, 1993) ARE AS FOLLOWS:
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS SINCE INCEPTION - ----------------------------------------- ------- -------- --------------- CALIFORNIA INSURED LONG-TERM (4/7/86) +14.53% +10.62% + 8.97% CALIFORNIA MONEY MARKET (6/1/87) + 2.42 + 4.42 + 4.49 NEW YORK INSURED TAX-FREE (4/7/86) +14.83 +10.78 + 8.41 PENNSYLVANIA INSURED LONG-TERM (4/7/86) +14.32 +10.91 + 9.23 PENNSYLVANIA MONEY MARKET (6/13/88) + 2.41 + 4.53 + 4.58 NEW JERSEY INSURED LONG-TERM (2/3/88) +15.16 +10.78 +10.39 NEW JERSEY MONEY MARKET (2/3/88) + 2.37 + 4.50 + 4.56 OHIO INSURED LONG-TERM (6/18/90) +14.76 -- +12.12 OHIO MONEY MARKET (6/18/90) + 2.38 -- + 3.72 FLORIDA INSURED TAX-FREE (9/1/92) +15.18 -- +15.03
THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET PORTFOLIO OF VANGUARD NEW JERSEY TAX-FREE FUND, IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
NET ASSET VALUE TOTAL PER SHARE NET ASSETS ------------------ TWELVE MONTHS (MILLIONS) AVERAGE AVERAGE NOV. 30, NOV. 30, ------------------------- CURRENT PORTFOLIO NOV. 30, 1993 MATURITY QUALITY* 1992 1993 DIVIDENDS TOTAL RETURN YIELD** - ---------------------------------------------------------------------------------------------------------------- MONEY MARKET CALIFORNIA $1,006 73 DAYS MIG 1 $ 1.00 $ 1.00 $.024 + 2.4% 2.32% PENNSYLVANIA 935 71 DAYS MIG 1 1.00 1.00 .024 + 2.4 2.25 NEW JERSEY 724 58 DAYS MIG 1 1.00 1.00 .023 + 2.3 2.23 OHIO 132 74 DAYS MIG 1 1.00 1.00 .023 + 2.4 2.36 - ---------------------------------------------------------------------------------------------------------------- INSURED LONG-TERM CALIFORNIA $1,074 11.3 YEARS Aaa $10.89 $11.30 $.803+ +11.5% 4.89% NEW YORK 807 9.9 YEARS Aaa 10.45 10.97 .739+ +12.4 4.73 PENNSYLVANIA 1,496 8.4 YEARS Aaa 10.96 11.36 .855+ +11.9 4.83 NEW JERSEY 748 9.5 YEARS Aaa 11.18 11.77 .772+ +12.5 4.76 OHIO 166 8.9 YEARS Aaa 11.07 11.61 .753+ +12.0 4.77 FLORIDA 269 10.7 YEARS Aaa 10.16 10.86 .537 +12.4 4.88 - ----------------------------------------------------------------------------------------------------------------
* MIG 1 and Aaa are Moody's highest ratings for, respectively, short-term and long-term municipal bonds. ** Money Market Portfolios' yields are 7-day annualized yields; others are 30-day SEC yields. + Include capital gains distributions of $.199 for California, $.145 for New York, $.224 for Pennsylvania, $.135 for New Jersey, and $.145 for Ohio. The shares of each of the Vanguard "single state" Portfolios are available for purchase solely by residents of the designated states. 6 9 REPORT FROM THE INVESTMENT ADVISER STATE INSURED LONG-TERM PORTFOLIOS * TIME FOR CHANGE? Just one year ago, President Clinton was elected on a platform of change. Since that time, the restrictive economic impact of higher taxes has overshadowed the relatively quiet role played by Federal Reserve policy, and long-term interest rates have declined precipitously. For the fiscal year ended November 30, 1993, the yield on the 30-year U.S. Treasury Bond fell 1.2 percentage points (from 7.5% to 6.3%). During the same period, high-grade, long-term municipal yields fell nearly three-quarters of a percentage point, from 6.2% to 5.5%. The net result was another year of good performance both for the State Insured Long-Term Portfolios and the bond market as a whole. In light of the many successive years of above-average returns by longer-maturity fixed-income investments, one has to wonder how much longer the rally can last. * MUNICIPAL BONDS ARE ATTRACTIVE VERSUS TAXABLE BONDS While municipal bond prices have risen sharply, taxable bond prices have rallied even more. High-grade tax-exempt bonds currently provide 86% of the yield on the 30-year U.S. Treasury bond, up from 82% at the beginning of the year. This "cheapening" has been due primarily to a huge increase in the pace of municipal bond issuance. Indeed, 1993 municipal supply set an all-time record of some $290 billion--fully 25% above the previous record set just last year, and easily twice the volume of a typical year's issuance. Municipalities of all types have flooded the marketplace to refinance higher cost debt at today's lower yield levels. We believe this process has run full course, and suggest that municipal bonds are extremely attractive when compared to their taxable brethren. The case for municipal bonds is even more compelling in light of recently increased marginal tax rates. * INVESTMENT STRATEGY Given the current environment, the State Insured Long-Term Bond Portfolios are pursuing the following investment strategies: * CALL PROTECTION. We continue to emphasize call protection in all of our longer bond portfolios. This strategy has produced greater price appreciation as yields have declined. Importantly, it also will insulate future dividends from an abrupt decline due to bond calls. * MUNICIPAL VERSUS TREASURY. We have positioned the Portfolios to take advantage of the exceptionally cheap relationship of municipal bonds versus Treasury bonds. This positioning has been accomplished by simultaneously establishing long positions in municipal bond futures contracts and short positions in Treasury bond futures contracts. Although this strategy has slightly detracted from annual performance thus far, we believe it will produce positive results in 1994. * "LONG AND RIGHT." Over the past few years, the State Insured Long-Term Portfolios have maintained a longer maturity structure and consequently a higher sensitivity to changes in interest rates than our competitors. This strategy has served us well and produced good longer-term results in a substantial bull market for fixed-income securities. During the course of the past year, we reduced somewhat our longer maturity structure to match that of our competitors, thereby "locking in" gains earned to date. In conclusion, the past twelve months has been an exciting period for bond fund shareholders. Plummeting interest rates have translated into attractive performance returns on long-term, tax-exempt, fixed-income investments. To be sure, this will be a tough standard to surpass. (continued) 7 10 STATE MONEY MARKET PORTFOLIOS Over the past twelve months, moderate economic expansion and low inflation enabled the Federal Reserve Board to hold key interest rates steady. The last policy action taken by the Fed occurred in early September 1992, when it lowered the Federal funds rate to 3%. Despite the overall stability in short-term rates, yields on tax-exempt money market funds continued to decline. Plagued by a combination of sporadic supply and strong investor demand, yields on state-specific money funds deteriorated 30 basis points, from 2.2% to 1.9%. Notwithstanding this yield decline, assets grew at a robust 14% rate. Strong performance versus the competition, due primarily to Vanguard's expense ratio advantage, enabled our money market funds to capture a large percentage of these assets. The volume of new issue supply differed greatly among the various state-specific funds. Recessionary and fiscal stress, which has persisted in California, forced many of its municipalities to finance their cash needs with short-term debt. As a result, July and August brought a flood of supply in California tax-exempt paper. At the opposite end of the spectrum was New Jersey, where diminished supply was attributable primarily to relatively low long-term interest rates. The many municipalities that previously issued short-term notes took advantage of these low rates by issuing long-term bonds instead. Looking forward, net new issuance in the first quarter of fiscal year 1994 is expected to remain light. Poised for this anticipated drought in supply, the Vanguard State Tax-Free Money Market Portfolios are currently targeting a minimum average weighted maturity of 75 days. Beyond the first quarter we will proceed with caution, as any signs of increased inflation may prompt the Federal Reserve Board to raise short-term interest rates. Sincerely, Ian A. MacKinnon Senior Vice President Jerome J. Jacobs Vice President Pamela E. Wisehaupt Vice President David E. Hamlin Assistant Vice President Danine A. Mueller Portfolio Manager Reid O. Smith Assistant Vice President Vanguard Fixed Income Group December 7, 1993 8 11 STATEMENT OF NET ASSETS FINANCIAL STATEMENTS November 30, 1993
Face Market Amount Value INSURED LONG-TERM PORTFOLIO (000) (000)+ - ----------------------------------------------------------------------------------------------------- MUNICIPAL BONDS (97.8%) - ----------------------------------------------------------------------------------------------------- ISSUER INSURED (79.7%) Atlantic City Board of Education 6.125%, 12/1/11 (2) $ 1,700 $ 1,829 6.15%, 12/1/12 (2) 2,500 2,695 Atlantic County COP 7.3%, 3/1/05 (3) 2,000 2,409 7.3%, 3/1/06 (3) 1,800 2,172 7.4%, 3/1/10 (3) 1,755 2,175 7.4%, 3/1/11 (3) 4,025 5,020 6.0%, 3/1/14 (3) 3,685 4,027 6.0%, 3/1/15 (3) 1,480 1,621 Bayshore Regional Sewer Auth. 5.4%, 5/1/12 (1) 500 501 Bergen County Utilities Auth. PCR 5.75%, 12/15/05 (3) 2,000 2,159 PCR 5.5%, 12/15/15 (3) 15,750 15,835 (Solid Waste) 5.5%, 6/15/13 (3) 9,000 9,073 Bordentown Sewer Auth. 5.375%, 12/1/15 (1) 6,250 6,250 5.4%, 12/1/20 (1) 1,400 1,396 6.8%, 12/1/25 (1) 3,500 3,900 Brick Township Municipal Utilities Auth. 6.5%, 12/1/12 (2) 1,000 1,123 Camden County Municipal Utilities Auth. Sewer Rev. 0.0%, 9/1/04(3) 8,345 4,825 0.0%, 9/1/05 (3) 18,545 10,109 0.0%, 9/1/06 (3) 18,545 9,517 8.25%, 12/1/17 (3) 850 986 Cape May County Industrial Development Auth. (Atlantic City Electric) 6.8%, 3/1/21 (1) 15,400 18,760 Cape May County Municipal Utility Auth. 7.25%, 1/1/94 (1) (Prere.) 5,055 5,201 7.25%, 1/1/94 (3) (Prere.) 1,945 2,001 6.8%, 8/1/98 (1) (Prere.) 4,655 5,244 5.75%, 1/1/16 (1) 11,225 11,520 Delaware River Port Auth. 7.375%, 1/1/07(2) 9,500 10,801 6.5%, 1/1/09 (2) 3,500 3,707 Edison Township GO 7.1%, 1/1/95 (2) 1,715 1,788 Elizabeth City Fiscal Year Adjustment Bonds 6.6%, 8/1/06(1) 8,750 9,728 Essex County Improvement Auth. Lease Rev. GO 7.0%, 12/1/00 (2) (Prere.) $13,000 $15,201 5.5%, 12/1/08 (2) 2,560 2,642 5.5%, 12/1/13 (2) 7,500 7,579 Essex County Improvement Auth. Township of Irvington GO 6.625%, 10/1/17 (4) 7,000 7,788 Evesham Municipal Utility Auth. 7.0%, 7/1/10 (1) 1,700 1,909 7.0%, 7/1/15 (1) 450 505 Gloucester Township GO 5.75%, 7/15/10 (2) 2,880 3,055 Gloucester Township Municipal Utilities Auth. 5.65%, 3/1/18 (2) 2,755 2,921 Hamilton Township Municipal Utility Auth. 6.0%, 8/15/17 (3) 1,000 1,062 Hoboken-Union City-Weehawken Sewer Auth. 0.0%, 8/1/03 (1) 3,800 2,335 0.0%, 8/1/04 (1) 3,750 2,178 0.0%, 8/1/05 (1) 3,805 2,083 0.0%, 8/1/06 (1) 2,000 1,031 6.25%, 8/1/13 (1) 9,590 10,820 Hudson County Correctional Facility COP 6.3%, 6/1/04 (1) 1,720 1,884 6.3%, 12/1/04 (1) 1,770 1,939 6.5%, 12/1/11 (1) 9,000 9,844 6.6%, 12/1/21 (1) 1,000 1,101 Hudson County General Improvement GO 6.55%, 7/1/04 (3) 1,300 1,481 6.55%, 7/1/05 (3) 1,290 1,473 6.55%, 7/1/06 (3) 700 805 6.55%, 7/1/07 (3) 1,300 1,491 6.55%, 7/1/09 (3) 635 730 Hudson County Improvement Auth. Lease 6.0%, 12/1/12 (3) 10,000 10,569 Irvington Township GO 0.0%, 8/1/07 (1) 1,000 485 0.0%, 8/1/09 (1) 2,580 1,104 0.0%, 8/1/10 (1) 2,080 836 Jersey City Sewer Auth. 7.0%, 1/1/97 (3) (Prere.) 5,500 6,068 Jersey City Water Auth. GO 7.6%, 10/1/12 (2) 700 793 7.6%, 10/1/13 (2) 700 793
9 12 STATEMENT OF NET ASSETS (continued)
Face Market Amount Value (000) (000)+ - ----------------------------------------------------------------------------------------------------- Lacey Municipal Utility Auth. 7.0%, 12/1/99 (6) (Prere.) $ 3,000 $ 3,471 Manchester Township Board of Education COP 7.2%, 12/15/09 (1) 1,000 1,150 Middlesex County Utility Auth. 6.75%, 8/15/09 (2) 3,500 3,812 6.5%, 9/15/11 (3) 6,300 6,858 Millville Board of Education GO 5.3%, 8/1/04 (2) 1,100 1,150 5.3%, 8/1/05 (2) 1,100 1,144 5.3%, 8/1/06 (2) 1,100 1,134 5.3%, 8/1/07 (2) 1,067 1,092 Monmouth County Improvement Auth. 6.875%, 8/1/12 (1) 2,700 3,001 6.75%, 2/1/13 (1) 1,250 1,387 Monroe Township Municipal Utility Auth. 6.875%, 2/1/17 (1) 1,700 1,906 Mount Laurel Township Municipal Utility Auth. 6.0%, 7/1/15 (1) 4,250 4,503 Muscanectong Sewer Auth. 7.15%, 1/1/00 (1) (Prere.) 1,000 1,160 New Brunswick Housing & Urban Development 6.0%, 7/1/12 (1) 6,000 6,382 5.75%, 7/1/24 (1) 8,640 8,832 New Brunswick Housing Auth. 5.5%, 8/1/16 (1) 525 529 New Brunswick Parking Auth. 5.4%, 9/1/15 (3) 1,000 996 New Jersey Economic Development Auth. (Hackensack Water) 7.0%, 1/1/19 (2) 2,400 2,631 New Jersey Educational Facilities Auth. (Kean College) 6.6%, 7/1/21 (1) 3,700 4,081 (NJ Inst. of Technology) 6.25%, 7/1/11 (2) 5,165 5,499 (Rider College) 6.2%, 7/1/17 (2) 4,000 4,309 (Trenton State College) 7.2%, 7/1/99 (2) (Prere.) 11,240 13,020 6.0%, 7/1/12 (2) 3,005 3,194 6.0%, 7/1/19 (2) 7,250 7,681 New Jersey Health Care Facilities Auth. (Bridgeton & Millville Hosp.) 7.875%, 7/1/10 (1) 3,305 3,813 (Burdette Tomlin Memorial Hosp.) 6.5%, 7/1/12 (3) $ 1,500 $ 1,640 (St. Clare's Riverside Medical Center) 7.75%, 7/1/14 (6) 5,800 6,601 (Community Medical Center) 7.0%, 7/1/20 (1) 2,850 3,249 (Hackensack Medical Center) 6.625%, 7/1/11 (3) 3,000 3,298 (Helene Fuld Medical Center) 6.6%, 7/1/21 (2) 4,080 4,473 (Jersey Shore Medical Center) 8.0%, 7/1/18 (2) 1,905 2,207 (Memorial Health Alliance) 6.25%, 7/1/10 (3) 8,000 8,399 (Mercer Medical Center) 6.25%, 7/1/06 (1) 1,685 1,825 6.5%, 7/1/10 (1) 6,000 6,565 (Mountainside Hosp.) 2.85%, 7/1/94 (1) 1,070 1,071 3.45%, 7/1/95 (1) 1,620 1,631 5.35%, 7/1/07 (1) 3,215 3,282 5.5%, 7/1/14 (1) 3,975 3,988 (Muhlenberg Medical Center) 8.0%, 7/1/18 (2) 750 869 (Shore Memorial Hosp.) 7.875%, 7/1/12 (1) 750 851 (Society of the Valley Hosp.) 6.625%, 7/1/10 (1) 2,750 3,014 (West Jersey Health System) 6.0%, 7/1/09 (1) 5,175 5,504 6.125%, 7/1/12 (1) 1,000 1,075 New Jersey Housing and Mortgage Finance Agency 9.625%, 10/1/08 (1) 530 552 7.875%, 10/1/17 (1) 450 482 New Jersey Sports & Exposition Auth. VRDO 2.15%, 3/1/94 (1) 2,100 2,100 New Jersey Turnpike Auth. 6.5%, 1/1/13 (1) 20,000 23,122 6.5%, 1/1/16 (1) 18,250 20,769 Newark General Improvement 5.3%, 10/1/06 (2) 1,710 1,761 5.4%, 10/1/07 (2) 1,685 1,741 5.5%, 10/1/08 (2) 1,660 1,728 Newark Water Utility 5.3%, 10/1/06 (2) 2,625 2,694 North Bergen GO 8.0%, 8/15/06 (4) 1,885 2,410 North Jersey Water Dist. 6.0%, 7/1/12 (1) 10,125 10,768
10 13
Face Market Amount Value (000) (000)+ - ----------------------------------------------------------------------------------------------------- Northwest Bergen County Utility Auth. 6.0%, 7/15/13 (1) $ 2,050 $ 2,190 Ocean County Utilities Waste Water Rev. 6.75%, 1/1/13 (3) 14,810 15,982 5.0%, 1/1/14 (3) 2,000 1,933 6.6%, 1/1/18 (3) (ETM) 2,500 2,993 6.6%, 1/1/18 (3) 4,000 4,358 Ocean Township Municipal Utility Auth. 6.0%, 8/1/17 (1) 3,975 4,376 Old Bridge Municipal Utility Auth. 6.4%, 11/1/09 (3) 3,000 3,301 6.25%, 11/1/16 (3) 1,400 1,514 Passaic Valley Sewer Comm. 7.1%, 12/1/97 (2) (Prere.) 6,785 7,693 5.75%, 12/1/08 (2) 4,450 4,672 5.75%, 12/1/13 (2) 2,500 2,584 Plainfield GO 6.25%, 7/15/07 (2) 6,930 7,544 Roselle GO 5.05%, 10/15/07 (1) 1,435 1,436 5.14%, 10/15/08 (1) 1,405 1,401 Salem County Improvement Auth. 7.125%, 5/1/99 (2) (Prere.) 1,000 1,151 Salem County Pollution Control Finance Auth. 5.7%, 5/1/28 (1) 5,000 5,084 South Jersey Transportation Auth. 5.8%, 11/1/05 (1) 1,645 1,773 5.9%, 11/1/06 (1) 3,435 3,711 5.9%, 11/1/07 (1) 2,545 2,734 6.0%, 11/1/12 (1) 5,250 5,592 Sussex County Solid Waste Rev. 5.75%, 12/1/09 (1) 19,820 20,657 Sussex Municipal Utility Auth. 5.25%, 12/1/08 (1) 1,150 1,160 5.375%, 12/1/14 (1) 2,000 1,996 West Windsor-Plainsboro School Dist. COP 7.6%, 3/15/97 (6) (Prere.) 5,000 5,646 5.875%, 3/15/07 (1) 1,390 1,489 5.875%, 3/15/08 (1) 1,465 1,556 OUTSIDE NEW JERSEY: Puerto Rico Public Building Auth. 0.0%, 7/1/02 (3) 4,000 2,662 -------- GROUP TOTAL 596,469 -------- - ----------------------------------------------------------------------------------------------------- PORTFOLIO INSURED (.2%) Rutgers State Univ. 7.375%, 5/1/96 (Prere.) 1,500 1,657 -------- - ----------------------------------------------------------------------------------------------------- SECONDARY MARKET INSURED (7.7%) Atlantic County Utility 6.875%, 1/1/12 (2) (ETM) $ 3,000 $ 3,541 New Jersey Educational Facilities Auth. (Montclair State College) 7.2%, 7/1/10 (1) 1,000 1,098 New Jersey Highway Auth. (Garden State Parkway) 6.2%, 1/1/10 (2) 20,000 22,370 6.0%, 1/1/16 (2) 5,000 5,217 New Jersey Sports & Exposition Auth. 6.5%, 3/1/13 (1) 10,000 11,502 Port. Auth. of New York & New Jersey 6.875%, 1/1/25 (2) 8,200 9,045 Univ. of Medicine & Dentistry 6.5%, 12/1/12 (1) 4,000 4,660 -------- GROUP TOTAL 57,433 -------- - ----------------------------------------------------------------------------------------------------- NON-INSURED (10.2%) Burlington County Bridge Comm. 5.3%, 10/1/13 9,500 9,396 Camden County BAN 3.25%, 2/23/94 4,900 4,908 Cherry Hill Township GO 6.3%, 6/1/12 4,745 5,092 Delaware River & Bay Auth. 4.5%, 1/1/95 4,000 4,053 Mercer County Improvement Auth. 5.75%, 12/15/07 1,110 1,177 5.75%, 12/15/08 1,165 1,226 5.95%, 12/15/12 4,895 5,286 Monmouth County Improvement Auth. GO (Correctional Facilities) 6.4%, 8/1/11 1,850 1,978 Monmouth County Improvement Auth. Pooled Govt. Loan VRDO 2.35%, 12/1/93 200 200 New Jersey Economic Development Auth. VRDO (Dow Chemical) 1.85%, 12/1/93 200 200 New Jersey Housing & Mortgage Finance Agency 3.4%, 3/29/95* 8,000 8,010 New Jersey Turnpike Auth. VRDO 2.2%, 1/1/94 30,000 30,000 Rutgers State Univ. GO 6.4%, 5/1/13 3,000 3,362
11 14 STATEMENT OF NET ASSETS (continued)
Face Market Amount Value (000) (000)+ - ----------------------------------------------------------------------------------------------------- OUTSIDE NEW JERSEY: Puerto Rico Govt. Development Bank VRDO 2.25%, 12/1/93 $900 $ 900 -------- GROUP TOTAL 75,788 -------- - ----------------------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (COST $666,898) 731,347 - ----------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (2.2%) - ----------------------------------------------------------------------------------------------------- Other Assets--Note B 20,398 Liabilities (3,614) -------- 16,784 - ----------------------------------------------------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------------------------------------------------- Applicable to 63,546,953 outstanding shares of beneficial interest (unlimited authorization--no par value) $748,131 - ----------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE $11.77 =====================================================================================================
+ See Note A to Financial Statements. For explanations of abbreviations and other references, see page 14.
- ----------------------------------------------------------------------------------------------------- AT NOVEMBER 30, 1993, NET ASSETS CONSISTED OF: - ----------------------------------------------------------------------------------------------------- Amount Per (000) Share -------- ------ Paid in Capital $682,282 $10.74 Undistributed Net Investment Income -- -- Accumulated Net Realized Gains 755 .01 Unrealized Appreciation of Investments 65,094 1.02 - ----------------------------------------------------------------------------------------------------- NET ASSETS $748,131 $11.77 - -----------------------------------------------------------------------------------------------------
Face Market Amount Value MONEY MARKET PORTFOLIO (000) (000)+ - ----------------------------------------------------------------------------------------------------- MUNICIPAL BONDS (100.2%) - ----------------------------------------------------------------------------------------------------- Bergen County BAN 2.82%, 6/28/94 $10,000 $10,001 Burlington County BAN 3.0%, 12/17/93 4,800 4,801 3.0%, 11/4/94 2,500 2,504 Burlington County GO 4.35%, 10/15/94 1,750 1,775 East Brunswick Township BAN 2.6%, 3/1/94 3,036 3,038 3.0%, 6/24/94 1,250 1,253 Edison Township TAN 2.62%, 12/17/93 15,000 15,001 Egg Harbor Township Board of Education 2.75%, 3/1/94 (1) 780 780 Essex County Improvement Auth. Pooled Govt. Loan VRDO 2.35%, 12/1/93 36,950 36,950 Fort Lee Borough BAN 2.54%, 5/6/94 6,900 6,901 Hackensack BAN 3.0%, 12/23/93 2,000 2,000 Hunterdon County GO BAN 2.53%, 8/31/94 8,325 8,327 Long Hill Township BAN 2.63%, 1/28/94 2,161 2,161 Mendham Township BAN 3.25%, 10/28/94 1,000 1,005 Mercer County BAN 2.75%, 1/14/94 15,000 15,006 Middlesex County GO 2.75%, 7/15/94 1,000 1,001 Monmouth County GO 5.0%, 7/1/94 1,320 1,337 Monmouth County Improvement Auth. Pooled Govt. Loan VRDO 2.35%, 12/1/93 29,800 29,800 Montvale Borough TAN 3.2%, 1/19/94 1,500 1,501 New Jersey Economic Development Auth. CP (Chambers Cogeneration) 2.15%, 12/7/93 7,100 7,100 2.2%, 12/9/93 17,600 17,600 (Exxon Corp.) 2.3%, 12/7/93 6,700 6,700 (Keystone Project) 2.3%, 12/9/93 6,000 6,000 2.6%, 1/18/94 14,000 14,000
12 15
Face Market Amount Value (000) (000)+ - ----------------------------------------------------------------------------------------------------- New Jersey Economic Development Auth. VRDO TOB 2.3%, 2/1/94 $15,000 $15,000 (Dow Chemical Co.) 1.85%, 12/1/93 5,300 5,300 (Makita Corp.) 2.15%, 12/1/93 3,700 3,700 New Jersey Educational Facilities Auth. College & Univ. Capital Improvement VRDO 2.05%, 12/1/93 (3) 2,650 2,650 New Jersey Health Care Facilities Auth. VRDO (Capital Assets) 2.25%, 12/1/93 30,500 30,500 (Carrier Foundation) 2.05%, 12/1/93 (3) 5,100 5,100 New Jersey Health Care Facilities Auth. (Hackensack Medical Center) 5.0%, 7/1/94 (3) 5,350 5,416 (Mountainside Hosp.) 2.85%, 7/1/94 (1) 1,000 1,001 New Jersey GO TOB VRDO 2.45%, 2/1/94 9,370 9,370 TOB 2.8%, 2/15/94* 25,000 25,000 7.1%, 4/15/94 (ETM) 5,000 5,082 5.8%, 8/1/94 (ETM) 1,000 1,020 New Jersey Housing Finance Agency TOB VRDO 2.55%, 4/1/94 (1) 8,900 8,900 New Jersey Housing & Mortgage Finance Agency 2.9%, 9/29/94* 15,000 15,000 New Jersey Sports & Exposition Auth. VRDO 2.15%, 3/1/94 (1) 59,300 59,300 New Jersey State Highway Auth. (Garden State Parkway) 6.3%, 1/1/94 1,000 1,003 New Jersey Turnpike Auth. VRDO 2.2%, 1/1/94 (3) 54,200 54,200 Parsippany--Troy Hills Township BAN 2.79%, 12/1/93 16,000 16,000 Passaic County BAN 2.82%, 12/7/93 2,000 2,000 2.75%, 4/7/94 10,900 10,908 3.25%, 7/7/94 33,000 33,129 Pequannock Township BAN 2.78%, 12/23/93 4,633 4,633 Piscataway Township BAN 3.125%, 9/9/94 6,310 6,332 Port Auth. of New York & New Jersey CP 2.25%, 12/6/93 $ 7,820 $ 7,820 2.4%, 12/7/93 7,330 7,330 2.45%, 12/7/93 1,300 1,300 2.4%, 12/10/93 13,900 13,900 2.55%, 1/25/94 1,210 1,210 2.7%, 2/8/94 23,400 23,401 2.7%, 10/1/94 2,500 2,500 Port Auth. of New York & New Jersey VRDO (Kiac Partners) 2.2%, 12/1/93 28,000 28,000 Randolph Township BAN 3.0%, 6/24/94 4,658 4,670 Readington Township BAN 2.625%, 5/4/94 1,284 1,285 Rockaway Township BAN 2.87%, 12/17/93 4,500 4,500 Rutgers Univ. GO 3.0%, 5/1/94 1,450 1,452 4.25%, 5/1/94 3,215 3,235 Salem County PCR CP (Philadelphia Electric) 2.65%, 1/27/94 5,000 5,000 Scotch Plains Township BAN 2.53%, 4/29/94 2,000 2,000 Sussex County BAN 2.5%, 4/19/94 5,000 5,000 3.25%, 6/28/94 6,650 6,674 Union County PCR Finance Auth. VRDO (Exxon Corp.) 1.8%, 12/1/93 14,000 14,000 OUTSIDE NEW JERSEY: Puerto Rico Govt. Development Bank VRDO 2.25%, 12/1/93 43,150 43,150 Puerto Rico Electric Power Auth. 10.25%, 7/1/94 (Prere.) 6,725 7,221 Puerto Rico Highway & Transportation Auth. VRDO 2.0%, 12/1/93 13,800 13,800 Puerto Rico Industrial, Medical & Environmental Finance Auth. (American Home Products) 3.35%, 12/1/93* 10,500 10,500 - ----------------------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (COST $725,034) 725,034 - -----------------------------------------------------------------------------------------------------
13 16 STATEMENT OF NET ASSETS (continued)
Market Value (000)+ - ----------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-.2%) - ----------------------------------------------------------------------------------------------------- Other Assets--Note B $18,117 Liabilities (19,339) -------- (1,222) - ----------------------------------------------------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------------------------------------------------- Applicable to 723,795,880 outstanding shares of beneficial interest (unlimited authorization--no par value) $723,812 - ----------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE $1.00 =====================================================================================================
+ See Note A to Financial Statements.
- ----------------------------------------------------------------------------------------------------- AT NOVEMBER 30, 1993, NET ASSETS CONSISTED OF: - ----------------------------------------------------------------------------------------------------- Amount Per (000) Share -------- ------ Paid in Capital $723,810 $1.00 Undistributed Net Investment Income -- -- Accumulated Net Realized Gains 2 -- Unrealized Appreciation of Investments -- -- - ----------------------------------------------------------------------------------------------------- NET ASSETS $723,812 $1.00 - -----------------------------------------------------------------------------------------------------
(1) MBIA (Municipal Bond Insurance Association) (2) AMBAC (AMBAC Indemnity Corporation) (3) FGIC (Financial Guaranty Insurance Company) (4) FSA (Financial Security Assurance) (5) CGI (Capital Guaranty Insurance) (6) BIGI (Bond Investors Guaranty Insurance) (7) Connie Lee Inc. (8) FHA (Federal Housing Authority) BAN--Bond Anticipation Note COP--Certificate of Participation CP--Commercial Paper GO--General Obligation IDR--Industrial Development Revenue PCR--Pollution Control Revenue RAN--Revenue Anticipation Note TAN--Tax Anticipation Note TOB--Tender Option Bond TRAN--Tax Revenue Anticipation Note VRDO--Variable Rate Demand Obligation (ETM)--Escrowed to Maturity (Prere.)--Prerefunded *Put Option Obligation. 14 17 STATEMENT OF OPERATIONS
INSURED LONG-TERM PORTFOLIO MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------------------------------------- Year Ended Year Ended November 30, 1993 November 30, 1993 (000) (000) - --------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Interest . . . . . . . . . . . . . . . $39,041 $16,723 - --------------------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . 39,041 16,723 - --------------------------------------------------------------------------------------------------------------- EXPENSES The Vanguard Group--Note B Investment Advisory Services . . . . . . $ 63 $ 64 Management and Administrative . . . . . 1,072 983 Marketing and Distribution . . . . . . . 176 1,311 231 1,278 -------- ------ Insurance Expense . . . . . . . . . . . . . 4 -- Auditing Fees . . . . . . . . . . . . . . . 8 7 Shareholders' Reports . . . . . . . . . . . 32 35 Annual Meeting and Proxy Costs . . . . . . 4 4 Trustees' Fees and Expenses . . . . . . . . 2 2 - --------------------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . 1,361 1,326 - --------------------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . 37,680 15,397 - --------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS)--Note C Investment Securities Sold . . . . . . . . 4,373 2 Futures Contracts . . . . . . . . . . . . . (3,619) -- - --------------------------------------------------------------------------------------------------------------- Realized Net Gain . . . . . . . . 754 2 - --------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)--Notes C and D Investment Securities . . . . . . . . . . . 38,842 -- Futures Contracts . . . . . . . . . . . . . 646 -- - --------------------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation (Depreciation) . . 39,488 -- - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . $77,922 $15,399 ===============================================================================================================
15 18 STATEMENT OF CHANGES IN NET ASSETS
INSURED LONG-TERM PORTFOLIO MONEY MARKET PORTFOLIO - --------------------------------------------------------------------------------------------------------------- YEAR ENDED Year Ended YEAR ENDED Year Ended NOVEMBER 30, November 30, NOVEMBER 30, November 30, 1993 1992 1993 1992 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net Investment Income . . . . . . . . . . . . $37,680 $30,435 $15,397 $17,236 Realized Net Gain--Note C . . . . . . . . . . 754 7,009 2 1 Change in Unrealized Appreciation (Depreciation)--Notes C and D . . . . . . . 39,488 11,855 -- -- - --------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . . . . . . . . . 77,922 49,299 15,399 17,237 - --------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1) Net Investment Income . . . . . . . . . . . . (37,680) (30,435) (15,397) (17,236) Realized Net Gain . . . . . . . . . . . . . . (7,008) (315) -- -- - --------------------------------------------------------------------------------------------------------------- Total Distributions . . . . . . . . . . (44,688) (30,750) (15,397) (17,236) - --------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (2) Issued -- Regular . . . . . . . . . . . . . 205,923 181,645 551,033 430,492 -- In Lieu of Cash Distributions . . 36,036 24,378 14,556 16,242 -- Exchange . . . . . . . . . . . . . 76,871 76,719 130,139 139,940 Redeemed -- Regular . . . . . . . . . . . . (93,405) (78,027) (458,197) (359,476) -- Exchange . . . . . . . . . . . . . (82,075) (85,298) (140,713) (147,171) - --------------------------------------------------------------------------------------------------------------- Net Increase from Capital Share Transactions . . . . . . . . . 143,350 119,417 96,818 80,027 - --------------------------------------------------------------------------------------------------------------- Total Increase . . . . . . . . . . . . 176,584 137,966 96,820 80,028 - --------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Year . . . . . . . . . . . . . . 571,547 433,581 626,992 546,964 - --------------------------------------------------------------------------------------------------------------- End of Year . . . . . . . . . . . . . . . $748,131 $571,547 $723,812 $626,992 =============================================================================================================== (1) Distributions Per Share Net Investment Income . . . . . . . . . $.637 $.659 $.023 $.030 Realized Net Gain . . . . . . . . . . . $.135 $.008 -- -- - --------------------------------------------------------------------------------------------------------------- (2) Shares Issued and Redeemed Issued . . . . . . . . . . . . . . . 24,358 23,484 681,172 570,432 Issued in Lieu of Cash Distributions . . 3,114 2,214 14,556 16,242 Redeemed . . . . . . . . . . . . . . . . (15,067) (14,872) (598,910) (506,647) - --------------------------------------------------------------------------------------------------------------- 12,405 10,826 96,818 80,027 - ---------------------------------------------------------------------------------------------------------------
16 19 FINANCIAL HIGHLIGHTS
INSURED LONG-TERM PORTFOLIO ----------------------------------------------------------------- Year Ended November 30, ----------------------------------------------------------------- For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $11.18 $10.75 $10.51 $10.45 $10.01 ------- ------- ------ ------ ------- INVESTMENT OPERATIONS Net Investment Income . . . . . . . . . . . . .637 .659 .676 .692 .708 Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . . . .725 .438 .245 .073 .440 ------- ------- ------ ------ ------- TOTAL FROM INVESTMENT OPERATIONS . . . 1.362 1.097 .921 .765 1.148 - ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income . . . . . (.637) (.659) (.676) (.692) (.708) Distributions from Realized Capital Gains . . (.135) (.008) (.005) (.013) -- ------- ------- ------ ------ ------- TOTAL DISTRIBUTIONS . . . . . . . . . . (.772) (.667) (.681) (.705) (.708) NET ASSET VALUE, END OF YEAR . . . . . . . . . . $11.77 $11.18 $10.75 $10.51 $10.45 ============================================================================================================================= TOTAL RETURN . . . . . . . . . . . . . . . +12.53% +10.48% +9.01% +7.66% +11.80% - ----------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------ Net Assets, End of Year (Millions) . . . . . . . $748 $572 $434 $245 $129 Ratio of Expenses to Average Net Assets . . . . . .20% .25% .24%+ .25%+ .24%+ Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . 5.47% 5.99% 6.33% 6.73% 6.88% Portfolio Turnover Rate . . . . . . . . . . . . . 12% 34% 18% 7% 0% - -----------------------------------------------------------------------------------------------------------------------------
+ Insurance expense represents .01%, .01% and .02%.
MONEY MARKET PORTFOLIO ---------------------------------------------------------------- Year Ended November 30, ---------------------------------------------------------------- For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 ------- ------- ------ ------ ------- INVESTMENT OPERATIONS Net Investment Income . . . . . . . . . . . . .023 .030 .045 .056 .062 Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . . . -- -- -- -- -- ------- ------- ------ ------ ------- TOTAL FROM INVESTMENT OPERATIONS . . . .023 .030 .045 .056 .062 - ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income . . . . . (.023) (.030) (.045) (.056) (.062) Distributions from Realized Capital Gains . . -- -- -- -- -- ------- ------- ------ ------ ------- TOTAL DISTRIBUTIONS . . . . . . . . . . (.023) (.030) (.045) (.056) (.062) - ----------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 ============================================================================================================================= TOTAL RETURN . . . . . . . . . . . . . . . +2.31% +3.04% +4.54% +5.78% +6.33% - ----------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------ Net Assets, End of Year (Millions) . . . . . . . $724 $627 $547 $464 $259 Ratio of Expenses to Average Net Assets . . . . . .20% .24% .24% .24% .23% Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . 2.29% 2.98% 4.43% 5.61% 6.16% Portfolio Turnover Rate . . . . . . . . . . . . . N/A N/A N/A N/A N/A - -----------------------------------------------------------------------------------------------------------------------------
17 20 NOTES TO FINANCIAL STATEMENTS Vanguard New Jersey Tax-Free Fund is registered under the Investment Company Act of 1940 as an open-end investment company and consists of the Insured Long-Term and Money Market Portfolios. Each Portfolio invests in debt instruments of municipal issuers whose ability to meet their obligations may be affected by economic and political developments in the State of New Jersey. * A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Money Market Portfolio: investment securities are stated at amortized cost which approximates market value. Insured Long-Term Portfolio: municipal bonds are valued utilizing primarily the latest bid prices or, if bid prices are not available, on the basis of valuations based on a matrix system (which considers such factors as security prices, yields, maturities and ratings), both as furnished by an independent pricing service. 2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to qualify as a regulated investment company and distribute all of its income. Accordingly, no provision for Federal income taxes is required in the financial statements. 3. FUTURES: The Insured Long-Term Portfolio may utilize futures contracts to a limited extent. The primary risks associated with the use of futures contracts are imperfect correlation between the change in market value of the bonds held by the Portfolio and the prices of futures contracts, and the possibility of an illiquid market. Futures contracts are valued based upon their quoted daily settlement prices. Fluctuations in the value of futures contracts are recorded as unrealized appreciation (depreciation) until terminated at which time realized gains (losses) are recognized. Unrealized appreciation (depreciation) related to open futures contracts is required to be treated as realized gain (loss) for Federal income tax purposes. 4. DISTRIBUTIONS: Distributions from net investment income are declared on a daily basis payable on the first business day of the following month. Annual distributions from realized gains, if any, are recorded on the ex-dividend date. Capital gain distributions are determined on a tax basis and may differ from realized capital gains for financial reporting purposes due to differences in the timing of realization of gains. 5. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on the sale of investment securities are those of specific securities sold. Premiums and original issue discounts are amortized and accreted, respectively, to interest income over the lives of the respective securities. * B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate management, administrative, marketing and distribution services. The costs of such services are allocated to the Fund under methods approved by the Board of Trustees. The Fund has contributed capital aggregating $241,000 to Vanguard (included in Other Assets), representing 1.2% of Vanguard's capitalization. The Fund's officers and trustees are also officers and directors of Vanguard. * C. During the year ended November 30, 1993, the Insured Long-Term Portfolio made purchases of $210,307,000 and sales of $74,917,000 of investment securities other than temporary cash investments. 18 21 NOTES TO FINANCIAL STATEMENTS (continued) At November 30, 1993, unrealized appreciation of investment securities of the Insured Long-Term Portfolio for financial reporting and Federal income tax purposes aggregated $64,449,000 of which $64,453,000 related to appreciated securities and $4,000 related to depreciated securities. * D. At November 30, 1993, the Insured Long-Term Portfolio had long positions in Municipal Bond Index futures contracts expiring through March 1994, with an aggregate settlement value and net unrealized depreciation of $33,122,000 and $397,000, respectively. The aggregate settlement value and net unrealized appreciation related to short positions in U.S. Treasury Bond and U.S. Treasury Note futures contracts expiring through March 1994, were $91,720,000 and $1,042,000, respectively. The market value of securities deposited as initial margin for open futures contracts was $1,698,000. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Trustees Vanguard New Jersey Tax-Free Fund In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Insured Long-Term Portfolio and the Money Market Portfolio (constituting the Vanguard New Jersey Tax-Free Fund, hereafter referred to as the "Fund") at November 30, 1993, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the respective periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 December 27, 1993 19 22 TRUSTEES AND OFFICERS JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President President and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of the Universal Health Realty Income Trust. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and Massachusetts Mutual Life Insurance Co. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker Fentress & Co., and The Southern New England Telephone Company. ALFRED M. RANKIN, Jr., President and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The Standard Products Company. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Company and NACCO Industries. JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of Cummins Engine Company and Vanderbilt University; Trustee of the Culver Educational Foundation. OTHER FUND OFFICERS RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD GROUP OFFICERS JEREMY G. DUFFIELD Senior Vice President Planning & Development JAMES H. GATELY Senior Vice President Institutional IAN A. MACKINNON Senior Vice President Fixed Income Group VINCENT S. MCCORMACK Senior Vice President Operations RALPH K. PACKARD Senior Vice President Chief Financial Officer 20 23 (Continued from inside front cover) toward those of the 1970s. However, the current level of inflation suggests that future real returns may prove to be satisfactory. Looking forward, the main risks to the investor are two: (1) that yields on financial assets will rise sharply, reducing the prices of stocks and bonds alike; and (2) that inflation, presently at moderate levels, will accelerate. SOME COURSES OF ACTION What, if any, present action should be taken by investors to deal with these two major risks? Should your allocation of assets among stock funds, bond funds, and money market funds be adjusted? Here are some reasonable courses of action to consider: * For long-term investors who have built a substantial balanced portfolio of stock, bond, and money market funds, stay the course. Even if withdrawing from the stock market proves to be justified, the next decision--when to return--will one day be required. "Being right twice" is no mean challenge. * For long-term investors gradually accumulating assets for, say, retirement, stay your present course. Continue to invest regularly. By doing so, you buy more shares of a mutual fund when its price falls, and fewer shares when its price rises, virtually assuring a reasonable average cost. * For risk-averse investors who are highly confident that stock prices are "too high," make only marginal--not "all or nothing"-- changes in your portfolio balance. Given the perils of predicting the future, any changes should be limited to, say, 15 percentage points. That is, if your normal portfolio allocation is 60% in stock funds, it might be reduced to 45%; if 85%, to 70%. * For investors who simply must have more income, never lose sight of the added principal risk involved in shifting from money market funds to bond funds. Long-term bond funds provide a generous and durable income stream, but their prices are highly volatile. Short-term and intermediate-term bond funds offer a "middle way" of increasing income with more modest risk to principal. * For investors who are tempted to find an "easy way" to higher returns, never forget that risk and reward go hand in hand. Precipitously replacing certificates of deposit with broad-based common stock funds verges on the irrational. Funds investing in other securities markets--emerging nations, international stocks and bonds, and small U.S. companies--carry their own special risks. Generally, limit such alternative investments to, say, 20% of your total portfolio. For all investors, be prepared for sharp interim swings in stock and bond prices. The central tenet of investing is "prices fluctuate," and sensible long-term investors simply must take such fluctuations in their stride. Successful investing is as much a function of your own discipline and equanimity as it is of the returns available in the securities markets. THREE ESSENTIAL PRINCIPLES As we confront the brave new world of investing that may well lie ahead in the coming decade--and it is important to think in decade-length terms--we would underscore three caveats: 1. Have "rational expectations" for future returns. At prices prevailing today, it seems highly unlikely that the returns enjoyed by investors in the past decade will be repeated in the coming decade. 2. Maintain a balanced portfolio consisting of stock, bond, and money market funds. Each asset class has its own risk and reward characteristics. By allocating your resources among the three asset classes according to your own requirements, you can build a portfolio providing appropriate elements of capital appreciation, capital conservation, and current income. 3. In balancing risk against reward, be sure to consider cost. Many mutual funds carry hefty sales charges or high expense ratios, or both. Other factors held equal, expenses reduce returns, dollar for dollar. Put another way, high-cost funds must select investments with higher prospective gross returns--which entail higher risks--to match the net returns earned by low-cost funds. This brief Annual Report essay can provide only an elementary look at the challenges investors face today. History can give us perspective, but it cannot give us performance. Famed British economist Lord Keynes had it right when he said, "the inevitable never happens. It is the unexpected always." 24 THE VANGUARD FAMILY OF FUNDS MONEY MARKET FUNDS Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Money Market Portfolio Vanguard State Tax-Free Funds Money Market Portfolios (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds Insured Long-Term Portfolios (CA, FL, NJ, NY, OH, PA) FIXED INCOME FUNDS Vanguard Admiral Funds Vanguard Bond Index Fund Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard Balanced Index Fund Vanguard STAR Fund Vanguard/Wellesley Income Fund Vanguard/Wellington Fund EQUITY FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Index Trust Vanguard Quantitative Portfolios Vanguard/Trustees' Equity Fund U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Small Capitalization Stock Fund Vanguard Specialized Portfolios INTERNATIONAL FUNDS Vanguard International Equity Index Fund Vanguard International Growth Portfolio Vanguard/Trustees' Equity Fund International Portfolio [VANGUARD LOGO] Vanguard Financial Center * Valley Forge, Pennsylvania 19482 New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q140-11/93 25 EDGAR Appendix This appendix describes components of the printed version of this report that do not translate into a format acceptable to the EDGAR system. The cover of the printed version of this report features the flags of The United States of America and Vanguard flying from a halyard. A bar chart called "A Tale of Two Decades" appears on the inside front cover. This chart illustrates Average Annual Total Return, in nominal and real terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades since 1973. A running head featuring the Vanguard flag logo appears at the top of pages one through 24. A photograph of John C. Bogle appears at the upper-right of page one. A line chart of the Month-End Yields shows 30-Year Prime Municipal Bond for the 90-Day MIG 1 Note on upper-left on page 2. Line charts illustrating Cumulative Performance of the Vanguard New Jersey Insured Long-Term compared to Lehman and Average Municipal New Jersey Bond Fund for the Fiscal Periods 1988-1993 on page 3. -----END PRIVACY-ENHANCED MESSAGE-----