N-CSR 1 tm2229005d4_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: 811-05445

 

Name of Registrant: Vanguard Fenway 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: September 30

 

Date of reporting period: October 1, 2021—September 30, 2022

 

 

 

 

Item 1:Reports to Shareholders

 

 

 

 

Annual Report   |   September 30, 2022
Vanguard Equity Income Fund

 

Contents
Your Fund’s Performance at a Glance

1
Advisors' Report

2
About Your Fund’s Expenses

6
Performance Summary

8
Financial Statements

10
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
The 12 months ended September 30, 2022, were a challenging period for financial markets. Vanguard Equity Income Fund returned −4.67% for Investor Shares and −4.58% for Admiral Shares. The fund outpaced its benchmark, which returned −5.30%.
Early on, pent-up demand helped spur global growth and push unemployment rates down. The economic backdrop deteriorated, however, as inflation soared to multidecade highs, fueled in part by higher energy and food prices in the wake of Russia’s invasion of Ukraine. Then price increases broadened to other categories of goods and services, adding to concerns that inflation would remain stubbornly high. That prompted aggressive tightening by the Federal Reserve to bring inflation back in check and increased fears of a recession. 
The fund’s two advisors focus on investing in large-capitalization value companies with higher yields, and they emphasize dividends. That focus helped the fund’s relative performance during the period, as value stocks generally outperformed their growth counterparts.
From a sector perspective, the greatest positive contribution came from consumer discretionary and financials. Energy and health care were the biggest detractors.
Market Barometer
  Average Annual Total Returns
Periods Ended September 30, 2022
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) -17.22% 7.95% 9.00%
Russell 2000 Index (Small-caps) -23.50 4.29 3.55
Russell 3000 Index (Broad U.S. market) -17.63 7.70 8.62
FTSE All-World ex US Index (International) -24.76 -0.95 -0.38
Bonds      
Bloomberg U.S. Aggregate Float Adjusted Index
(Broad taxable market)
-14.61% -3.22% -0.23%
Bloomberg Municipal Bond Index
(Broad tax-exempt market)
-11.50 -1.85 0.59
FTSE Three-Month U.S. Treasury Bill Index 0.63 0.57 1.12
CPI      
Consumer Price Index 8.20% 4.95% 3.76%
1

 

Advisors’ Report
For the fiscal year ended September 30, 2022, Vanguard Equity Income Fund returned −4.67% for Investor Shares and −4.58% for Admiral Shares. While performance was negative, the fund outpaced its benchmark, which returned −5.30%. Your fund is managed by Wellington Management Company llp and Vanguard Quantitative Equity Group. The use of two investment advisors provides exposure to distinct yet complementary investment approaches, enhancing the diversification of your fund. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The table on page 7 presents the percentage and amount of the fund’s assets that each advisor manages, as well as brief descriptions of their investment strategies. The advisors have also prepared a discussion of the investment environment that existed during the fiscal year and of how their portfolio positioning reflects this assessment. These comments were prepared on October 18, 2022.
Wellington Management Company llp
Portfolio Manager:
Matthew C. Hand, CFA
Managing Director
U.S. equities fell over the year ended September 30, 2022. Markets rallied early in the period on the back of robust equity inflows, strong corporate earnings, favorable economic data, and extremely accommodative financial conditions.
However, the rapid spread of the Omicron variant led to the largest increase in U.S. COVID-19 cases since the onset of the pandemic, prompting a flurry of new restrictions and event cancellations. Inflation continued to surge against a backdrop of severe supply and labor shortages, rising energy prices, high demand for goods and services, and heightening scrutiny of the U.S. Federal Reserve amid anxiety about a potential policy mistake.
Equity markets fell sharply in the second quarter of 2022, when rampant inflation and tighter financial conditions hurt risk sentiment and increased the probability of recession. Rapidly rising prices for food and energy pushed consumer inflation to its highest level in more than four decades. Growth stocks significantly underperformed their value counterparts as surging Treasury yields and disappointing earnings results from some of the largest technology companies drove the Nasdaq Composite Index to its biggest quarterly loss since September 2001.
Equity market weakness persisted through the end of the period. Risk sentiment deteriorated on fears that aggressive interest rate hikes and tighter financial conditions would constrict economic growth and drive the U.S. to recession. Despite these concerns, Fed Chair Jerome Powell made clear that the central bank is committed to raising interest rates and keeping them elevated until clear evidence shows that price pressures are abating.
 
2

 

During the fiscal year, sector allocation, a result of our bottom-up stock selection process, contributed most to relative outperformance in our portion of the fund. Our overweight to health care and underweight to communication services drove returns, while our overweight to real estate and underweight to energy detracted. Security selection also added to relative results in financials, consumer discretionary, and industrials. This was partially offset by negative selection in health care, information technology, and energy.
From an individual stock perspective, the largest contributors to relative performance were U.S.-based exploration and production companies Pioneer Natural Resources and ConocoPhillips and not holding Intel, a U.S.-based semiconductor chip manufacturer. The largest detractors were not holding benchmark constituents ExxonMobil and Chevron, both U.S.-based globally integrated oil and gas companies, and not holding AbbVie, a U.S.-based pharmaceuticals company.
At the end of the period, our portion of the fund was most overweight in health care, information technology, and real estate. Financials, communication services, and consumer staples were our largest underweights.
Notable purchases during the year included EOG Resources, Atmos Energy, and Coterra Energy. EOG Resources is a U.S.-based exploration and production company. The stock discounted a lower energy price while offering more diversification of its resource base and
solid execution around cost inflation by management. We also favored EOG’s opportunistic, more cross-cycle and balanced capital returns profile.
Atmos Energy is a fully integrated gas utility company. Its stock traded at a reasonable valuation despite our view of the company as higher quality, evidenced by its low leverage and strong outlook for asset base growth. We see this quality as sustainable because of the firm’s focus on maintenance, reliability, and emissions reduction. We also regard its 2.4% yield as sustainable, with a below-peer payout ratio.
Coterra Energy is a U.S.-based diversified energy company created from a strategic merger between Cabot Oil & Gas and Cimarex Energy. We favored the 50/50 balance of its oil and gas businesses and the more defensive “all-weather” profile it provides, even in more challenged markets. In addition, both of the merged companies have a good cost structure, strong balance sheets, and attractive reserves life. In terms of valuation, Coterra’s stock was trading more cheaply than its peers and the stated dividend policy made its capital return profile attractive.
Significant eliminations included Bank of America, Progressive, and Lockheed Martin. We eliminated our position in Bank of America to fund other financials with more compelling risk/reward profiles, such as M&T Bank and JPMorgan Chase. Shares of Progressive and Lockheed Martin both rallied notably during the period. We saw more balanced trade-offs
3

 

at these higher levels and redeployed the sales proceeds elsewhere.
As always, we remain focused on finding investment opportunities in quality dividend-paying companies with attractive total-return potential at discounted valuations.
Vanguard Quantitative Equity Group
Portfolio Manager
Sharon Hill, Ph.D., head of the Alpha Equity Global and Income Investment team within Vanguard’s Quantitative Equity Group
The 12 months ended September 30, 2022, were a challenging period for financial markets.  Early on, pent-up demand helped spur global growth and push unemployment rates down. The economic backdrop deteriorated, however, as inflation soared to multidecade highs, fueled in part by higher energy and food prices in the wake of Russia’s invasion of Ukraine. Then price increases broadened to other categories of goods and services, adding to concerns that inflation would remain stubbornly high. That prompted aggressive tightening by the Federal Reserve to bring inflation back in check and increased fears of a recession.
The Russell 3000 Index, the benchmark for the entire U.S. stock market, returned −17.63% for the fiscal year. Although still in negative territory, dividend-paying stocks fared much better than the broader market.
Although it’s important to understand how overall performance is affected by macro factors, our approach to investing focuses on stock-specific fundamentals. During the year, we further customized our stock-selection model, transitioning from our previous six-characteristic approach to a model with four main themes to increase our emphasis on dividends and cash flow.
Our four themes, or “sub-models,” are (1) sustainable dividend growth—a record of increasing dividends over the long- and medium-term, coupled with reasonable payout ratios and healthy cash flow growth; (2) sentiment—indications from market participants that there may be good future prospects, such as low or declining levels of short interest or optimism throughout the supply chain; (3) quality—indicators of a healthy balance sheet and stable fundamentals; and (4) valuation—a diversified basket of long-, medium-, and near-term valuation metrics that can draw finer distinctions within the stocks in our benchmark, which tend to embody value characteristics because of the focus on high dividend yield.
Using these four themes, we generate a daily composite stock ranking, just as we did when we used six themes. We then monitor our portfolio based on those rankings and adjust when appropriate to maximize expected returns while minimizing exposure to risks that our research indicates don’t improve returns (such as industry exposures and other risks relative to our benchmark).
4

 

The sentiment component of the model performed best over the year, whereas valuation performed the worst. Our strongest sector results were in materials, consumer discretionary, and consumer staples, primarily due to stock selection. The largest sector detractors were in financials, industrials, and health care.
At the stock level, top contributors included overweight positions in
consumer discretionary stock H&R Block, energy firm EOG Resources, and financial company Unum Group. Detractors included underweight positions in energy stocks ConocoPhillips and ExxonMobil—particularly as energy stocks performed very well during the year—and an overweight to consumer financial firm Ally Financial.
Vanguard Equity Income Fund Investment Advisors
 
  Fund Assets Managed  
Investment Advisor % $ Million Investment Strategy
Wellington Management Company LLP 64 30,481 A fundamental approach to seeking desirable stocks. Our selections typically offer above-average dividend yields, below-average valuations, and the potential for dividend increases in the future.
Vanguard Quantitative Equity Group 34 16,385 Employs a quantitative fundamental management approach, using models that assess valuation, growth prospects, management decisions, market sentiment, and earnings and balance-sheet quality of companies as compared with their peers.
Cash Investments 2 995 These short-term reserves are invested by Vanguard in equity index products to simulate investment in stocks. Each advisor may also maintain a modest cash position.
5

 

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.
6

 

Six Months Ended September 30, 2022      
  Beginning
Account Value
3/31/2022
Ending
Account Value
9/30/2022
Expenses
Paid During
Period
Based on Actual Fund Return      
Equity Income Fund      
Investor Shares $1,000.00 $867.40 $1.31
Admiral™ Shares 1,000.00 868.00 0.89
Based on Hypothetical 5% Yearly Return      
Equity Income Fund      
Investor Shares $1,000.00 $1,023.67 $1.42
Admiral Shares 1,000.00 1,024.12 0.96
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 0.28% for Investor Shares and 0.19% 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 (183/365).
7

 

Equity Income 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: September 30, 2012, Through September 30, 2022
Initial Investment of $10,000
    Average Annual Total Returns
Periods Ended September 30, 2022
 
    One
Year
Five
Years
Ten
Years
Final Value
of a $10,000
Investment
 Equity Income Fund Investor Shares -4.67% 7.32% 10.26% $26,552
 FTSE High Dividend Yield Index -5.30 6.56 9.97 25,874
 Dow Jones U.S. Total Stock Market Float Adjusted Index -18.05 8.48 11.28 29,120
       
    One
Year
Five
Years
Ten
Years
Final Value
of a $50,000
Investment
Equity Income Fund Admiral Shares -4.58% 7.42% 10.36% $134,006
FTSE High Dividend Yield Index -5.30 6.56 9.97 129,371
Dow Jones U.S. Total Stock Market Float Adjusted Index -18.05 8.48 11.28 145,598
See Financial Highlights for dividend and capital gains information.
8

 

Equity Income Fund
Fund Allocation
As of September 30, 2022
Communication Services 2.3%
Consumer Discretionary 6.3
Consumer Staples 12.7
Energy 9.5
Financials 18.0
Health Care 18.8
Industrials 9.1
Information Technology 9.6
Materials 4.0
Real Estate 1.2
Utilities 8.5
The table reflects the fund’s investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
9

 

Equity Income Fund
Financial Statements
Schedule of Investments
As of September 30, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (97.1%)
Communication Services (2.3%)
  Comcast Corp. Class A 23,449,815    687,783
  Verizon Communications Inc.  6,393,626    242,766
  AT&T Inc.  4,186,547     64,222
  Interpublic Group of Cos. Inc.  2,230,706     57,106
  Omnicom Group Inc.    455,653     28,747
       1,080,624
Consumer Discretionary (6.2%)
  Home Depot Inc.  3,204,459    884,238
  TJX Cos. Inc.  7,827,160    486,223
  Lowe's Cos. Inc.  2,122,255    398,581
  Lennar Corp. Class A  4,296,981    320,340
  Starbucks Corp.  2,483,915    209,295
  McDonald's Corp.    887,079    204,685
  Target Corp.  1,006,705    149,385
  Best Buy Co. Inc.  1,476,623     93,529
  H&R Block Inc.  1,983,358     84,372
  Whirlpool Corp.    309,289     41,695
  Advance Auto Parts Inc.    266,019     41,589
  Genuine Parts Co.    221,931     33,139
       2,947,071
Consumer Staples (12.3%)
  Procter & Gamble Co.  6,677,519    843,037
  Philip Morris International Inc.  7,888,099    654,791
  Mondelez International Inc. Class A 11,830,956    648,691
  Unilever plc ADR 13,321,083    583,996
  Archer-Daniels-Midland Co.  6,857,451    551,682
  PepsiCo Inc.  3,009,897    491,396
  Kellogg Co.  5,125,857    357,067
  Walmart Inc.  2,544,552    330,028
  Keurig Dr Pepper Inc.  8,545,303    306,093
  Kimberly-Clark Corp.  2,503,625    281,758
  Coca-Cola Co.  3,468,086    194,282
  Altria Group Inc.  4,376,955    176,742
  Hershey Co.    648,843    143,050
  Kroger Co.  2,764,459    120,945
  Tyson Foods Inc. Class A  1,553,056    102,393
  Colgate-Palmolive Co.  1,063,821     74,734
  Coca-Cola Europacific Partners plc    590,332     25,160
  Medifast Inc.    129,514     14,034
    Shares Market
Value

($000)
  Nu Skin Enterprises Inc. Class A    372,121     12,418
       5,912,297
Energy (9.2%)
  ConocoPhillips 10,350,252  1,059,245
  EOG Resources Inc.  6,913,728    772,471
  Coterra Energy Inc. 20,339,914    531,279
  Exxon Mobil Corp.  4,478,183    390,990
  Chevron Corp.  2,324,273    333,928
  Phillips 66  4,013,832    323,997
1 TC Energy Corp.  7,630,740    307,362
  Pioneer Natural Resources Co.  1,292,094    279,777
  Marathon Petroleum Corp.  1,621,776    161,091
  Diamondback Energy Inc.    877,134    105,660
  Valero Energy Corp.    659,759     70,495
  Targa Resources Corp.    609,381     36,770
  APA Corp.    972,830     33,261
  Halliburton Co.    871,300     21,451
       4,427,777
Financials (17.4%)
  JPMorgan Chase & Co. 13,829,832  1,445,217
  Morgan Stanley 11,718,854    925,907
  MetLife Inc. 12,827,164    779,635
  Chubb Ltd.  3,340,294    607,533
  M&T Bank Corp.  2,927,431    516,165
  Blackstone Inc.  4,693,217    392,822
  Bank of America Corp. 11,781,594    355,804
  Royal Bank of Canada  3,852,301    346,842
  Truist Financial Corp.  7,803,037    339,744
  PNC Financial Services Group Inc.  2,074,353    309,950
  Raymond James Financial Inc.  3,094,996    305,847
  Wells Fargo & Co.  7,009,670    281,929
  Citigroup Inc.  4,383,587    182,664
  Aflac Inc.  2,321,185    130,451
  Ameriprise Financial Inc.    471,536    118,803
  Allstate Corp.    941,412    117,234
  Discover Financial Services  1,088,494     98,966
  Synchrony Financial  3,255,317     91,767
  Ally Financial Inc.  3,119,116     86,805
  Jefferies Financial Group Inc.  2,931,818     86,489
10

 

Equity Income Fund
    Shares Market
Value

($000)
  Hartford Financial Services Group Inc.  1,396,066     86,472
  Fidelity National Financial Inc.  2,319,935     83,982
  Zions Bancorp NA  1,336,276     67,963
  Goldman Sachs Group Inc.    230,918     67,670
  Unum Group  1,734,061     67,282
  OneMain Holdings Inc.  1,591,260     46,974
  MGIC Investment Corp.  3,547,370     45,477
  US Bancorp    959,065     38,669
  Fifth Third Bancorp  1,180,122     37,717
  Comerica Inc.    497,541     35,375
  SLM Corp.  2,508,274     35,091
  First American Financial Corp.    676,639     31,193
  BlackRock Inc.     53,378     29,373
  Travelers Cos. Inc.    171,701     26,305
  Bank of New York Mellon Corp.    682,104     26,275
  PacWest Bancorp  1,130,623     25,552
  Radian Group Inc.  1,017,476     19,627
  Popular Inc.    233,385     16,818
  Jackson Financial Inc. Class A    570,294     15,826
  Assurant Inc.     46,159      6,705
  State Street Corp.    107,263      6,523
       8,337,443
Health Care (18.3%)
  Johnson & Johnson 10,129,845  1,654,811
  Pfizer Inc. 31,573,944  1,381,676
  Merck & Co. Inc. 14,279,575  1,229,757
  Eli Lilly & Co.  3,480,470  1,125,410
  UnitedHealth Group Inc.    826,794    417,564
  AstraZeneca plc ADR  6,618,375    362,952
  Roche Holding AG  1,072,640    349,179
  Medtronic plc  4,068,466    328,529
  Elevance Health Inc.    701,296    318,557
  Becton Dickinson and Co.  1,311,689    292,284
  AbbVie Inc.  2,101,704    282,070
  Baxter International Inc.  4,370,213    235,380
  CVS Health Corp.  2,312,795    220,571
  Amgen Inc.    971,415    218,957
  Gilead Sciences Inc.  3,095,169    190,941
  Bristol-Myers Squibb Co.  1,549,239    110,135
  Viatris Inc.  3,835,127     32,675
       8,751,448
Industrials (8.8%)
  General Dynamics Corp.  2,946,156    625,086
  Johnson Controls International plc 10,365,584    510,194
  Eaton Corp. plc  3,213,497    428,552
  L3Harris Technologies Inc.  1,683,318    349,844
  Honeywell International Inc.  2,088,812    348,769
  Raytheon Technologies Corp.  4,238,604    346,972
  Siemens AG (Registered)  3,312,255    323,749
  Canadian National Railway Co.  2,803,705    302,789
  United Parcel Service Inc. Class B    968,201    156,403
    Shares Market
Value

($000)
  Lockheed Martin Corp.    357,496    138,097
  Emerson Electric Co.  1,752,639    128,328
  Cummins Inc.    597,854    121,669
  Caterpillar Inc.    640,170    105,039
  Waste Management Inc.    653,902    104,762
  Triton International Ltd.  1,135,524     62,147
  ManpowerGroup Inc.    777,180     50,276
  nVent Electric plc    958,138     30,287
  Nielsen Holdings plc    880,964     24,420
  Snap-on Inc.    100,175     20,170
  3M Co.    151,386     16,728
  PACCAR Inc.    158,163     13,237
       4,207,518
Information Technology (9.3%)
  Cisco Systems Inc. 19,977,476    799,099
  QUALCOMM Inc.  4,874,638    550,737
  Broadcom Inc.  1,104,897    490,585
  Analog Devices Inc.  3,332,575    464,361
  Texas Instruments Inc.  2,726,052    421,938
  Corning Inc. 11,472,378    332,928
  TE Connectivity Ltd.  2,998,924    330,961
  NXP Semiconductors NV  1,983,529    292,590
  Fidelity National Information Services Inc.  3,840,577    290,232
  HP Inc.  4,640,361    115,638
  Automatic Data Processing Inc.    447,034    101,115
  Western Union Co.  5,719,757     77,217
  Intel Corp.  2,500,408     64,436
  International Business Machines Corp.    471,153     55,978
  KLA Corp.    134,535     40,714
  Seagate Technology Holdings plc    134,787      7,175
       4,435,704
Materials (3.9%)
  LyondellBasell Industries NV Class A  5,651,873    425,473
  PPG Industries Inc.  3,342,839    370,019
1 Rio Tinto plc ADR  5,753,910    316,810
  Celanese Corp. Class A  2,214,329    200,043
  Reliance Steel & Aluminum Co.    625,283    109,056
  CF Industries Holdings Inc.    980,902     94,412
  Steel Dynamics Inc.  1,267,292     89,914
  Dow Inc.  2,012,209     88,396
  Nucor Corp.    813,744     87,062
  Linde plc    322,341     86,900
  Olin Corp.    165,222      7,085
       1,875,170
Real Estate (1.1%)
  Crown Castle Inc.  1,917,048    277,109
  Welltower Inc.  4,089,421    263,032
         540,141
Utilities (8.3%)
  American Electric Power Co. Inc.  7,220,391    624,203
  Exelon Corp. 16,270,545    609,495
  Sempra Energy (XNYS)  3,356,109    503,215
  Duke Energy Corp.  5,189,580    482,735
  Atmos Energy Corp.  4,502,509    458,581
  NextEra Energy Inc.  5,742,302    450,254
 
11

 

Equity Income Fund
    Shares Market
Value

($000)
  WEC Energy Group Inc.  1,272,958    113,841
  NRG Energy Inc.  2,715,160    103,909
  PPL Corp.  3,998,712    101,367
  Vistra Corp.  3,640,881     76,458
  AES Corp.  3,191,411     72,126
  UGI Corp.  2,090,344     67,581
  Portland General Electric Co.  1,159,728     50,402
  National Fuel Gas Co.    718,573     44,228
  IDACORP Inc.    405,354     40,134
  DTE Energy Co.    347,699     40,003
  Evergy Inc.    610,173     36,244
  Eversource Energy    362,076     28,227
  Edison International    429,100     24,278
  NiSource Inc.    638,127     16,074
  Southern Co.    125,443      8,530
       3,951,885
Total Common Stocks
(Cost $40,264,117)
46,467,078
Temporary Cash Investments (3.7%)
Money Market Fund (3.1%)
2,3 Vanguard Market Liquidity Fund, 2.828%  14,728,844  1,472,442
    Face
Amount
($000)
 
Repurchase Agreements (0.6%)
  Goldman, Sachs & Co. 2.980%, 10/3/22
(Dated 9/30/22, Repurchase Value $88,122,000, collateralized by Ginnie Mae 2.690%–3.500%, 6/15/48–5/15/57, with a value of $89,862,000)  
    88,100     88,100
  NatWest Markets plc 2.980%, 10/3/22
(Dated 9/30/22, Repurchase Value $112,728,000, collateralized by U.S. Treasury Note/Bond 2.750%–4.250%, 2/15/24–8/31/27, with a value of $114,954,000)  
   112,700    112,700
    Face
Amount
($000)
Market
Value

($000)
  Nomura International plc 2.970%, 10/3/22
(Dated 9/30/22, Repurchase Value $107,127,000, collateralized by Federal Home Loan Bank 0.000%, 3/31/23, Freddie Mac 0.000%, 7/15/32, and U.S. Treasury Note/Bond 0.250%–3.000%, 5/31/25–10/31/27, with a value of $109,266,000)  
   107,100    107,100
         307,900
Total Temporary Cash Investments (Cost $1,780,175) 1,780,342
Total Investments (100.8%) (Cost $42,044,292) 48,247,420
Other Assets and Liabilities—Net (-0.8%) (386,215)
Net Assets (100%) 47,861,205
Cost is in $000.
See Note A in Notes to Financial Statements.
1 Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $472,357,000.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
3 Collateral of $506,375,000 was received for securities on loan.
  ADR—American Depositary Receipt.
 
12

 

Equity Income Fund

Derivative Financial Instruments Outstanding as of Period End

Futures Contracts
      ($000)
  Expiration Number of
Long (Short)
Contracts
Notional
Amount
Value and
Unrealized
Appreciation
(Depreciation)
Long Futures Contracts        
E-mini S&P 500 Index December 2022 5,790 1,042,634 (135,962)
  
See accompanying Notes, which are an integral part of the Financial Statements.
13

 

Equity Income Fund
Statement of Assets and Liabilities
As of September 30, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value1  
Unaffiliated Issuers (Cost $40,572,017) 46,774,978
Affiliated Issuers (Cost $1,472,275) 1,472,442
Total Investments in Securities 48,247,420
Investment in Vanguard 1,918
Cash 10,695
Cash Collateral Pledged—Futures Contracts 56,959
Foreign Currency, at Value (Cost $1) 47
Receivables for Investment Securities Sold 229,228
Receivables for Accrued Income 94,057
Receivables for Capital Shares Issued 35,928
Total Assets 48,676,252
Liabilities  
Payables for Investment Securities Purchased 255,486
Collateral for Securities on Loan 506,375
Payables to Investment Advisor 11,352
Payables for Capital Shares Redeemed 24,564
Payables to Vanguard 2,248
Variation Margin Payable—Futures Contracts 15,022
Total Liabilities 815,047
Net Assets 47,861,205
1 Includes $472,357 of securities on loan.  
At September 30, 2022, net assets consisted of:  
   
Paid-in Capital 39,042,425
Total Distributable Earnings (Loss) 8,818,780
Net Assets 47,861,205
 
Investor Shares—Net Assets  
Applicable to 127,474,295 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
4,822,614
Net Asset Value Per Share—Investor Shares $37.83
 
Admiral Shares—Net Assets  
Applicable to 542,875,850 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
43,038,591
Net Asset Value Per Share—Admiral Shares $79.28
  
See accompanying Notes, which are an integral part of the Financial Statements.
14

 

Equity Income Fund
Statement of Operations
  Year Ended
September 30, 2022
  ($000)
Investment Income  
Income  
Dividends1 1,536,557
Interest2 11,144
Securities Lending—Net 370
Total Income 1,548,071
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 41,134
Performance Adjustment 6,257
The Vanguard Group—Note C  
Management and Administrative—Investor Shares 9,562
Management and Administrative—Admiral Shares 41,788
Marketing and Distribution—Investor Shares 406
Marketing and Distribution—Admiral Shares 2,359
Custodian Fees 261
Auditing Fees 31
Shareholders’ Reports—Investor Shares 68
Shareholders’ Reports—Admiral Shares 572
Trustees’ Fees and Expenses 19
Other Expenses 18
Total Expenses 102,475
Expenses Paid Indirectly (55)
Net Expenses 102,420
Net Investment Income 1,445,651
Realized Net Gain (Loss)  
Investment Securities Sold2 3,101,244
Futures Contracts (73,100)
Foreign Currencies (254)
Realized Net Gain (Loss) 3,027,890
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2 (6,773,012)
Futures Contracts (104,129)
Foreign Currencies (780)
Change in Unrealized Appreciation (Depreciation) (6,877,921)
Net Increase (Decrease) in Net Assets Resulting from Operations (2,404,380)
1 Dividends are net of foreign withholding taxes of $3,687,000.
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 $7,655,000, ($186,000), $16,000, and ($17,000), respectively. Purchases and sales are for temporary cash investment purposes.
  
See accompanying Notes, which are an integral part of the Financial Statements.
15

 

Equity Income Fund
Statement of Changes in Net Assets
  Year Ended September 30,
  2022
($000)
2021
($000)
     
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 1,445,651 1,168,906
Realized Net Gain (Loss) 3,027,890 2,715,655
Change in Unrealized Appreciation (Depreciation) (6,877,921) 7,103,797
Net Increase (Decrease) in Net Assets Resulting from Operations (2,404,380) 10,988,358
Distributions    
Investor Shares (417,573) (138,888)
Admiral Shares (3,618,297) (1,066,361)
Total Distributions (4,035,870) (1,205,249)
Capital Share Transactions    
Investor Shares 181,131 (398,046)
Admiral Shares 5,413,453 4,023,566
Net Increase (Decrease) from Capital Share Transactions 5,594,584 3,625,520
Total Increase (Decrease) (845,666) 13,408,629
Net Assets    
Beginning of Period 48,706,871 35,298,242
End of Period 47,861,205 48,706,871
  
See accompanying Notes, which are an integral part of the Financial Statements.
16

 

Equity Income Fund
Financial Highlights
Investor Shares          
For a Share Outstanding
Throughout Each Period 
Year Ended September 30,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $42.95 $33.75 $36.51 $37.98 $35.64
Investment Operations          
Net Investment Income1 1.159 1.041 1.000 1.002 .965
Net Realized and Unrealized Gain (Loss) on Investments (2.848) 9.232 (2.067) .972 2.764
Total from Investment Operations (1.689) 10.273 (1.067) 1.974 3.729
Distributions          
Dividends from Net Investment Income (1.134) (1.012) (1.034) (.997) (.943)
Distributions from Realized Capital Gains (2.297) (.061) (.659) (2.447) (.446)
Total Distributions (3.431) (1.073) (1.693) (3.444) (1.389)
Net Asset Value, End of Period $37.83 $42.95 $33.75 $36.51 $37.98
Total Return2 -4.67% 30.66% -2.87% 6.43% 10.58%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $4,823 $5,285 $4,482 $5,478 $5,751
Ratio of Total Expenses to Average Net Assets3 0.28%4 0.28% 0.28% 0.27% 0.27%
Ratio of Net Investment Income to Average Net Assets 2.69% 2.56% 2.89% 2.84% 2.60%
Portfolio Turnover Rate 40% 29% 35% 32% 37%
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.01%, 0.01%, 0.01%, and (0.00%).
4 The ratio of expenses to average net assets for the period net of reduction from custody fee offset and broker commission abatement arrangements was 0.28%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
17

 

Equity Income Fund
Financial Highlights
Admiral Shares          
For a Share Outstanding
Throughout Each Period 
Year Ended September 30,
2022 2021 2020 2019 2018
Net Asset Value, Beginning of Period $90.01 $70.73 $76.52 $79.61 $74.69
Investment Operations          
Net Investment Income1 2.516 2.262 2.159 2.167 2.099
Net Realized and Unrealized Gain (Loss) on Investments (5.973) 19.342 (4.331) 2.028 5.806
Total from Investment Operations (3.457) 21.604 (2.172) 4.195 7.905
Distributions          
Dividends from Net Investment Income (2.460) (2.196) (2.236) (2.156) (2.048)
Distributions from Realized Capital Gains (4.813) (.128) (1.382) (5.129) (.937)
Total Distributions (7.273) (2.324) (3.618) (7.285) (2.985)
Net Asset Value, End of Period $79.28 $90.01 $70.73 $76.52 $79.61
Total Return2 -4.58% 30.77% -2.77% 6.51% 10.70%
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $43,039 $43,422 $30,816 $30,972 $27,625
Ratio of Total Expenses to Average Net Assets3 0.19%4 0.19% 0.19% 0.18% 0.18%
Ratio of Net Investment Income to Average Net Assets 2.78% 2.64% 2.98% 2.93% 2.69%
Portfolio Turnover Rate 40% 29% 35% 32% 37%
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.01%, 0.01%, 0.01%, and (0.00%).
4 The ratio of expenses to average net assets for the period net of reduction from custody fee offset and broker commission abatement arrangements was 0.19%.
  
See accompanying Notes, which are an integral part of the Financial Statements.
18

 

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

 

Equity Income Fund
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. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Any securities pledged as initial margin for open contracts are noted in the Schedule of Investments.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures contracts.
During the year ended September 30, 2022, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
5. 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.
6. 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.
7. 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
20

 

Equity Income Fund
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.
8. 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 September 30, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
9. Other: Dividend income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
21

 

Equity Income Fund
Taxes on foreign dividends and capital gains have been provided for in accordance with the fund's understanding of the applicable countries' tax rules and rates. Deferred foreign capital gains tax, if any, is accrued daily based upon net unrealized gains. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received and related professional fees incurred during the year, if any, are included in dividend income and other expenses, respectively. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Wellington Management Company llp provides investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee is subject to quarterly adjustments based on performance relative to the FTSE High Dividend Yield Index for the preceding three years.
Vanguard provides investment advisory services to a portion of the fund as described below; the fund paid Vanguard advisory fees of $1,955,000 for the year ended September 30, 2022.
For the year ended September 30, 2022, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.08% of the fund’s average net assets, before a net increase of $6,257,000 (0.01%) 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 investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At September 30, 2022, the fund had contributed to Vanguard capital in the amount of $1,918,000, representing less than 0.01% of the fund’s net assets and 0.77% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund has asked its investment advisor to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the year ended September 30, 2022, these arrangements reduced the fund’s expenses by $55,000 (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 and derivatives. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
22

 

Equity Income Fund
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments and derivatives valued with significant unobservable inputs are noted on the Schedule of Investments.
The following table summarizes the market value of the fund’s investments and derivatives as of September 30, 2022, based on the inputs used to value them:
  Level 1
($000)
Level 2
($000)
Level 3
($000)
Total
($000)
Investments        
Assets        
Common Stocks 45,794,150 672,928 46,467,078
Temporary Cash Investments 1,472,442 307,900 1,780,342
Total 47,266,592 980,828 48,247,420
Derivative Financial Instruments        
Liabilities        
Futures Contracts1 135,962 135,962
1 Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities.
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 distributions in connection with fund share redemptions were reclassified between the following accounts:
  Amount
($000)
Paid-in Capital 152,642
Total Distributable Earnings (Loss) (152,642)
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; the recognition of unrealized gains or losses from certain derivative contracts; and the deferral of qualified late-year
23

 

Equity Income Fund
losses. 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 72,777
Undistributed Long-Term Gains 2,614,443
Capital Loss Carryforwards
Qualified Late-Year Losses (13,703)
Net Unrealized Gains (Losses) 6,145,224
The tax character of distributions paid was as follows:
  Year Ended September 30,
  2022
Amount
($000)
2021
Amount
($000)
Ordinary Income* 1,723,789 1,141,227
Long-Term Capital Gains 2,312,081 64,022
Total 4,035,870 1,205,249
* Includes short-term capital gains, if any.
As of September 30, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
  Amount
($000)
Tax Cost 42,101,909
Gross Unrealized Appreciation 9,527,906
Gross Unrealized Depreciation (3,382,395)
Net Unrealized Appreciation (Depreciation) 6,145,511
G. During the year ended September 30, 2022, the fund purchased $22,385,780,000 of investment securities and sold $19,837,802,000 of investment securities, other than temporary cash investments.
The fund purchased securities from and sold securities to other funds or accounts managed by its investment advisors or their affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment Company Act of 1940. For the year ended September 30, 2022, such purchases were $123,309,000 and sales were $281,262,000, resulting in net realized gain of $51,595,000; these amounts, other than temporary cash investments, are included in the purchases and sales of investment securities noted above.
24

 

Equity Income Fund
H. Capital share transactions for each class of shares were:
    
  Year Ended September 30,  
  2022   2021
  Amount
($000)
Shares
(000)
  Amount
($000)
Shares
(000)
Investor Shares          
Issued 847,534 19,586   905,414 22,254
Issued in Lieu of Cash Distributions 385,775 9,104   127,115 3,134
Redeemed (1,052,178) (24,275)   (1,430,575) (35,121)
Net Increase (Decrease)—Investor Shares 181,131 4,415   (398,046) (9,733)
Admiral Shares          
Issued 9,294,275 102,758   9,053,463 106,583
Issued in Lieu of Cash Distributions 3,190,190 35,953   918,531 10,777
Redeemed (7,071,012) (78,259)   (5,948,428) (70,619)
Net Increase (Decrease)—Admiral Shares 5,413,453 60,452   4,023,566 46,741
I. Management has determined that no events or transactions occurred subsequent to September 30, 2022, that would require recognition or disclosure in these financial statements.
25

 

Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Fenway Funds and Shareholders of Vanguard Equity Income Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Vanguard Equity Income Fund (one of the funds constituting Vanguard Fenway Funds, referred to hereafter as the "Fund") as of September 30, 2022, the related statement of operations for the year ended September 30, 2022, the statement of changes in net assets for each of the two years in the period ended September 30, 2022, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2022 (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 September 30, 2022, 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 September 30, 2022 and the financial highlights for each of the five years in the period ended September 30, 2022 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 September 30, 2022 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
November 18, 2022
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
26

 


Tax information (unaudited)
For corporate shareholders, 88.7%, 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 $1,498,465,000, or if subsequently determined to be different, the maximum amount allowable by law, as qualified dividend income for individual shareholders for the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund for the fiscal year are qualified short-term capital gains.
The fund distributed $2,464,722,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.
The fund hereby designates $2,836,000, 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.
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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 (2002–2006), the advisory board of the University of California, Berkeley School of Engineering (2020–present), and the advisory board
of Santa Clara University’s Leavey School of Business (2018–present).
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. (specialized consumer services). Director of the V Foundation. Member of the advisory council for the College of
 
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.

 

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 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: adjunct professor of finance at the University of Notre Dame (2020–present). Chief investment officer (retired 2020) and vice president (retired 2020) of the University of Notre Dame. Assistant professor (retired June 2020) of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of superintendence of the Institute for the Works of Religion, 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. 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board (2018–present) of RIT Capital Partners (investment
firm). Member of the investment committee of Partners Health Care System.
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 (2021–present), professor (2020–present), Distinguished Fellow of the Global Financial Markets Center (2020–present), and Rubenstein Fellow (2017–2020) at Duke University. Trustee (2017–present) of Amherst College and member of Amherst College Investment Committee (2019–present). Member of the Regenerative Crisis Response Committee (2020–present).
David A. 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 (2013–present). Trustee of Common Fund (2019–present).
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
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–present) 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.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
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
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This material may be used in conjunction with the offering of shares of any Vanguard fund only if preceded or accompanied by the fund’s current prospectus.
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 2022, Bloomberg. All rights reserved.
CFA® is a registered trademark owned by CFA Institute.
© 2022 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q650 112022

 

 

Annual Report   |   September 30, 2022
Vanguard PRIMECAP Core Fund

 

Contents
Your Fund’s Performance at a Glance

1
Advisor’s Report

2
About Your Fund’s Expenses

6
Performance Summary

8
Financial Statements

10
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
The 12 months ended September 30, 2022, were a challenging period for financial markets. Vanguard PRIMECAP Core Fund returned –15.92% for the period. Its benchmark, the MSCI US Prime Market 750 Index, returned –17.32%.
Early on, pent-up demand helped spur global growth and push down unemployment rates. The economic backdrop deteriorated, however, as inflation soared to multidecade highs, fueled in part by higher energy and food prices in the wake of Russia’s invasion of Ukraine. Then price increases broadened to other categories of goods and services, adding to concerns that inflation would remain stubbornly high. That prompted aggressive tightening by the Federal Reserve to bring inflation back in check and increased fears of a recession.
Small-, mid-, and large-capitalization stocks all posted negative returns for the 12-month period. Large-capitalization stocks held up better than mid- and small-caps, while value stocks outperformed growth.
Compared with the benchmark, the fund’s performance was helped most by stock selection in the health care sector, while stock selection in industrials, information technology, and consumer discretionary detracted from relative results.
Market Barometer
  Average Annual Total Returns
Periods Ended September 30, 2022
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) -17.22% 7.95% 9.00%
Russell 2000 Index (Small-caps) -23.50 4.29 3.55
Russell 3000 Index (Broad U.S. market) -17.63 7.70 8.62
FTSE All-World ex US Index (International) -24.76 -0.95 -0.38
Bonds      
Bloomberg U.S. Aggregate Float Adjusted Index
(Broad taxable market)
-14.61% -3.22% -0.23%
Bloomberg Municipal Bond Index
(Broad tax-exempt market)
-11.50 -1.85 0.59
FTSE Three-Month U.S. Treasury Bill Index 0.63 0.57 1.12
CPI      
Consumer Price Index 8.20% 4.95% 3.76%
1

 

Advisor’s Report
For the 12 months ended September 30, 2022, Vanguard PRIMECAP Core Fund returned –15.92%, ahead of the –17.32% total return of the fund’s benchmark, the MSCI US Prime Market 750 Index, as well as the –17.61% total return of the fund’s multi-capitalization core fund competitors. The fund’s performance was in line with the –15.47% return of the Standard & Poor’s 500 Index, which serves as a proxy for the broad market in the attribution discussion that follows. Relative to the S&P 500, the fund’s favorable sector allocation offset unfavorable stock selection during the period.
Investment environment
The fiscal year ended September 30, 2022, was characterized by an abrupt degradation in market conditions. The year started on the upswing, with a continuation of the COVID-19-era recovery—and this despite yet another bout of COVID, as the contagious Omicron variant peaked in mid-January. But in this case the prognosis was mostly good news: Omicron proved more disruptive than destructive, and ultimately COVID’s grip on society was loosened.
Geopolitical hostility and widespread inflation, however, soon supplanted COVID as primary concerns. Russia’s invasion of Ukraine devastated the region and continues to pose risks to Europe and the world. At home, savings-rich consumers, fattened by abundant government stimulus, increasingly returned to pre-COVID activities, forcing businesses into a hiring spree. By summertime, record-high job openings
outnumbered job seekers 2 to 1, reflecting an unprecedented imbalance between labor demand and supply. Inflation thus broadened and worsened during the period. Price spikes in goods and commodities hemorrhaged into stickier categories like wages and services.
The Federal Reserve, chagrined by its earlier complacency as inflation ramped to runaway levels, executed a dramatic hawkish pivot, punctuated by an ongoing series of aggressive rate hikes. The real economy stalled somewhat; despite solid nominal economic growth and a tight labor market, real GDP declined during the first half of 2022. Yet the Fed resolved to further reduce economic activity, raising the prospects of a hard landing.
Equities unsurprisingly faltered amid this tumult, plummeting more than 25% from their January peak. Elevated inflation and rising interest rates weighed especially on high-valuation growth stocks in the S&P 500 Index; the communication services (–39%), consumer discretionary (–21%), and information technology (–20%) sectors lagged the market. Energy (+46%) fared best, boosted by higher oil prices. Defensive sectors also outperformed, including utilities (+6%), consumer staples (flat), and health care (–3%).
Outlook for U.S. equities
The S&P 500 Index’s valuation is now slightly below historical norms (15.2x forward P/E versus the 15.5x 20-year average). Likewise, the 10-year Treasury
 
2

 

yield jumped to nearly 4%, a decade-high rate and comparable to its longer-term historical norm. These metrics on a standalone basis perhaps warrant a neutral outlook.
But this ignores above-average macroeconomic risks, as the Fed’s explicit intention is to slow the economy. Forward earnings expectations are likely too high, even after abnormally large downward revisions to near-term estimates. Recent earnings reports have generally disappointed, with guidance reductions commonplace. Also, the stronger dollar has a direct negative impact on earnings given companies’ substantial foreign exposures; we observe limited evidence of the dollar’s mid-teen appreciation (versus year-ago levels, as measured by the U.S. Dollar Index) in next year’s earnings estimates. These concerns, among others, leave us somewhat cautious overall, even after the market’s swift recalibration. 
Portfolio update
The portfolio maintained its substantial overweight positions in health care and industrials stocks; these sectors comprised 39% of average assets compared to their 22% combined weighting in the S&P 500. The portfolio was underweight information technology (24% of average assets versus 28% for the S&P 500), consumer discretionary (11% versus 12%), financials (10% versus 11%), communication services (6% versus 9%), energy (3% versus 4%), and materials (2% versus 3%). The fund
maintained limited exposure to consumer staples, real estate, and utilities.
Sector allocation was modestly favorable during the period. The fund benefited from its overweight position in the health care sector, its underweight position in communication services, and a modest cash position. These tailwinds were partly offset by underweight positions in the three best-performing sectors, energy, utilities, and consumer staples.
Unfavorable stock selection detracted from relative results, with strength in health care more than offset by weakness in industrials and information technology. The fund’s largest position, Eli Lilly (+42%), logged another stellar year on the back of its new obesity drug, tirzepatide, while biotechnology heavyweights Amgen (+10%) and Biogen (-6%) also outperformed the market; animal health company Elanco (–61%) provided a partial offset. Within industrials, despite reopening momentum Southwest (–40%) underperformed as fuel costs spiked. German industrial automation company Siemens (–38%) also underperformed, with currency weakness compounding company-specific challenges. Within information technology, Adobe (–52%) and Intel (–50%) were cut in half during the period, adding to the headwind from the fund’s sizable underweight position in Apple (–2%).
As of September 30, 2022, the fund’s top 10 holdings comprised 32% of assets.
3

 

Advisor perspectives
We assess this year’s developments as a potential paradigm shift in the market. Notwithstanding an occasional glitch, the decade-plus since the Great Recession had been remarkably benign, with accommodative financial conditions, steady if modest global economic growth, and a relentless equity bull market. A pliant Federal Reserve, offering investors quasi-insurance in the form of a “Fed put,” underwrote a “buy the dip” mentality that became ubiquitous.
But the COVID era—both the virus and especially the policy response to it—ultimately sowed enough dislocation to tip the proverbial apple cart. Ironically, it was COVID’s abrupt fade, or rather, its welcome shift to endemic status, that applied the final push. The mass normalization of society, coupled with two years of excessive money supply growth, unleashed the worst inflation in 40 years. 
The hallmarks of the prior paradigm—low interest rates, inflation, and growth—bred a certain type of winner. Growth stocks, for instance, dominated value, and large likewise trumped small; in the 13 calendar years from 2009 through 2021, growth and large outperformed their counterparts 10 times each. Growth outperformed value by 650 basis points annually (the Russell 3000 Growth Index returned 19.1%; its value counterpart returned 12.6%), while large outpaced small by 230 basis points annually (the Russell 1000 and Russell 2000 returned 16.1% and 13.8%, respectively). The ultimate winners were Big Tech stocks; the ascendance of
Apple, Amazon, Alphabet, Meta, and Netflix—the so-called FAANG stocks—explains much of this large growth stock phenomenon.
A new paradigm would upend this dynamic, as investors migrate from yesterday’s darlings to fresh leadership. Over the past year, FAANG stocks indeed struggled; Netflix (–61%), Meta (–60%), Amazon (–31%), and Alphabet (–28%) all badly lagged, with only Apple (–2%) holding its ground. That said, picking the next winners is never straightforward. Despite largely avoiding the FAANG collapses, the fund still struggled in relative terms due to its own idiosyncratic miscues. Energy and defensive sectors outperformed during the fiscal year, as did value. Other than several biopharmaceutical companies, our differentiated holdings generally failed to deliver.
But tomorrow’s longer-term winners are, as always, uncertain. The contours of this potential new paradigm have yet to take shape. Rapidly rising rates tend to break things, and we expect wreckage if the Fed perseveres. But eventually we believe a less Fed-centric market will arise, one where fundamentals and valuations feature more prominently than last decade’s artificial backstop. We are optimistic our holdings’ promising long-term fundamentals and attractive valuations will benefit from this evolution.
Conclusion
Our investment approach is vulnerable to extended periods of underperformance;
4

 

mistakes and misfortune sometimes conspire, and the COVID era included plenty of both. But we have high conviction much better days are ahead, and we see in the current market reckoning a paradigm shift may be underway. We believe the fund is well positioned, and we are also searching for new opportunities amid the market carnage.
PRIMECAP Management Company
October 13, 2022
5

 

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.
6

 

Six Months Ended September 30, 2022      
PRIMECAP Core Fund Beginning
Account Value
3/31/2022
Ending
Account Value
9/30/2022
Expenses
Paid During
Period
Based on Actual Fund Return $1,000.00 $821.40 $2.10
Based on Hypothetical 5% Yearly Return 1,000.00 1,022.76 2.33
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 0.46%. 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 (183/365).
7

 

PRIMECAP Core 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: September 30, 2012, Through September 30, 2022
Initial Investment of $10,000
    Average Annual Total Returns
Periods Ended September 30, 2022
 
    One
Year
Five
Years
Ten
Years
Final Value
of a $10,000
Investment
 PRIMECAP Core Fund -15.92% 7.24% 12.33% $31,993
 MSCI US Prime Market 750 Index -17.32 9.12 11.67 30,161
 Dow Jones U.S. Total Stock Market Float Adjusted Index -18.05 8.48 11.28 29,120
See Financial Highlights for dividend and capital gains information.
8

 

PRIMECAP Core Fund
Fund Allocation
As of September 30, 2022
Communication Services 6.1%
Consumer Discretionary 10.6
Consumer Staples 0.7
Energy 3.5
Financials 9.3
Health Care 29.9
Industrials 14.6
Information Technology 23.0
Materials 2.2
Real Estate 0.1
The table reflects the fund’s investments, except for short-term investments. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
9

 

PRIMECAP Core Fund
Financial Statements
Schedule of Investments
As of September 30, 2022
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
    Shares Market
Value

($000)
Common Stocks (94.8%)
Communication Services (5.8%)
* Alphabet Inc. Class A 1,808,000   172,935
* Alphabet Inc. Class C 1,398,740   134,489
* T-Mobile US Inc.   488,657    65,563
* Walt Disney Co.   604,835    57,054
  Activision Blizzard Inc.   651,950    48,466
  Nintendo Co. Ltd.   507,500    20,470
* Meta Platforms Inc. Class A   149,200    20,243
  Electronic Arts Inc.   154,850    17,918
* Charter Communications Inc. Class A    41,450    12,574
  Comcast Corp. Class A   178,538     5,236
* Altice USA Inc. Class A   688,200     4,012
* Netflix Inc.     7,300     1,719
        560,679
Consumer Discretionary (10.0%)
  Sony Group Corp. ADR 1,865,200   119,466
* Mattel Inc. 6,082,651   115,205
  TJX Cos. Inc. 1,604,600    99,678
  Whirlpool Corp.   713,804    96,228
  Ross Stores Inc. 1,049,390    88,432
* CarMax Inc. 1,162,790    76,767
* Alibaba Group Holding Ltd. ADR   864,700    69,167
* Tesla Inc.   239,400    63,501
* Dollar Tree Inc.   347,200    47,254
* Royal Caribbean Cruises Ltd.   797,400    30,222
  Marriott International Inc. Class A   184,290    25,826
  Newell Brands Inc. 1,670,000    23,196
  Bath & Body Works Inc.   584,300    19,048
* Capri Holdings Ltd.   446,363    17,158
* Victoria's Secret & Co.   561,433    16,349
  McDonald's Corp.    53,000    12,229
  Restaurant Brands International Inc.   151,200     8,041
* Leslie's Inc.   511,100     7,518
* Burlington Stores Inc.    62,500     6,993
  Lowe's Cos. Inc.    30,000     5,634
* Carnival Corp.   632,100     4,444
* O'Reilly Automotive Inc.     4,300     3,024
* Las Vegas Sands Corp.    79,600     2,987
  MGM Resorts International    95,000     2,823
* AutoZone Inc.     1,055     2,260
  Hilton Worldwide Holdings Inc.    13,800     1,665
* Amazon.com Inc.    14,500     1,639
    Shares Market
Value

($000)
* Norwegian Cruise Line Holdings Ltd.    68,440       778
        967,532
Consumer Staples (0.7%)
* BJ's Wholesale Club Holdings Inc.   306,600    22,323
  Sysco Corp.   238,500    16,864
  Tyson Foods Inc. Class A   187,700    12,375
  Altria Group Inc.   248,924    10,052
  Mowi ASA   157,000     1,997
  Philip Morris International Inc.    15,500     1,287
  Kroger Co.    25,000     1,094
  Constellation Brands Inc. Class A     4,400     1,011
         67,003
Energy (3.4%)
  Pioneer Natural Resources Co.   694,173   150,309
  EOG Resources Inc.   333,221    37,231
  Valero Energy Corp.   311,900    33,326
  Coterra Energy Inc. 1,037,050    27,088
  Hess Corp.   236,000    25,722
  Cameco Corp.   962,800    25,524
* Southwestern Energy Co. 2,000,000    12,240
* TechnipFMC plc   649,500     5,495
* Transocean Ltd. (XNYS) 1,237,200     3,056
  Schlumberger NV    50,700     1,820
  Technip Energies NV     7,820        88
        321,899
Financials (8.8%)
  Raymond James Financial Inc. 1,808,560   178,722
  Wells Fargo & Co. 4,099,400   164,878
  JPMorgan Chase & Co. 1,356,146   141,717
  Northern Trust Corp. 1,088,650    93,145
  Goldman Sachs Group Inc.   278,200    81,526
  Discover Financial Services   547,281    49,759
  Evercore Inc. Class A   505,900    41,610
  US Bancorp   568,300    22,914
  Charles Schwab Corp.   229,034    16,461
  Progressive Corp.   138,300    16,072
  CME Group Inc.    80,450    14,250
  Bank of America Corp.   464,059    14,015
  Marsh & McLennan Cos. Inc.    58,812     8,780
  Morgan Stanley    53,100     4,195
        848,044
10

 

PRIMECAP Core Fund
    Shares Market
Value

($000)
Health Care (28.3%)
  Eli Lilly & Co. 2,290,682   740,692
  Amgen Inc. 1,459,470   328,965
* Biogen Inc. 1,184,827   316,349
  AstraZeneca plc ADR 5,656,820   310,220
  Thermo Fisher Scientific Inc.   357,340   181,239
  Bristol-Myers Squibb Co. 1,862,280   132,390
  Novartis AG ADR 1,740,270   132,278
* Boston Scientific Corp. 2,998,230   116,121
  Roche Holding AG   220,493    71,778
  CVS Health Corp.   653,900    62,362
  Zimmer Biomet Holdings Inc.   552,950    57,811
* Elanco Animal Health Inc. (XNYS) 4,366,091    54,183
* LivaNova plc   730,300    37,077
  Abbott Laboratories   332,870    32,209
  Agilent Technologies Inc.   261,350    31,767
* BioMarin Pharmaceutical Inc.   288,770    24,479
* Illumina Inc.    93,790    17,894
1 Siemens Healthineers AG   358,975    15,398
* IQVIA Holdings Inc.    84,222    15,256
  Stryker Corp.    55,820    11,306
  Humana Inc.    17,844     8,658
  Alcon Inc.   125,260     7,288
  Sanofi ADR   135,300     5,144
  Danaher Corp.    19,140     4,944
  Medtronic plc    59,600     4,813
  UnitedHealth Group Inc.     8,489     4,287
* Waters Corp.    10,431     2,811
* Zimvie Inc.    31,040       306
      2,728,025
Industrials (13.8%)
* Southwest Airlines Co. 6,583,969   203,050
  AECOM 2,810,300   192,140
  Siemens AG (Registered) 1,538,528   150,380
  FedEx Corp.   988,800   146,807
  Jacobs Solutions Inc.   952,595   103,347
  United Parcel Service Inc. Class B   497,900    80,431
  Airbus SE   626,409    53,997
* United Airlines Holdings Inc. 1,465,340    47,668
* Delta Air Lines Inc. 1,531,940    42,986
  TransDigm Group Inc.    81,850    42,957
  General Dynamics Corp.   156,800    33,268
  Textron Inc.   529,060    30,823
  Caterpillar Inc.   186,740    30,640
  Union Pacific Corp.   149,500    29,126
* American Airlines Group Inc. 2,199,000    26,476
* XPO Logistics Inc.   396,200    17,639
  Carrier Global Corp.   462,500    16,446
  Deere & Co.    35,670    11,910
  JB Hunt Transport Services Inc.    71,500    11,184
* GXO Logistics Inc.   270,600     9,487
  Otis Worldwide Corp.   145,500     9,283
  CSX Corp.   339,000     9,031
* Saia Inc.    45,300     8,607
  Science Applications International Corp.    80,000     7,074
  L3Harris Technologies Inc.    34,000     7,066
  Rockwell Automation Inc.    25,650     5,518
  Pentair plc    87,100     3,539
    Shares Market
Value

($000)
  AMETEK Inc.    10,000     1,134
  Old Dominion Freight Line Inc.     4,500     1,119
      1,333,133
Information Technology (21.8%)
  Microsoft Corp. 1,197,400   278,874
  Texas Instruments Inc. 1,516,500   234,724
  KLA Corp.   643,100   194,621
  Intel Corp. 6,280,480   161,848
* Flex Ltd. 8,416,200   140,214
  Applied Materials Inc. 1,088,500    89,181
  Micron Technology Inc. 1,715,860    85,965
  Intuit Inc.   181,550    70,318
  HP Inc. 2,643,223    65,869
  Analog Devices Inc.   456,700    63,637
  QUALCOMM Inc.   557,340    62,968
  Visa Inc. Class A   353,100    62,728
  Oracle Corp.   995,050    60,768
  Hewlett Packard Enterprise Co. 4,903,608    58,745
  ASML Holding NV GDR (Registered)   130,000    53,995
  NetApp Inc.   768,000    47,501
  Telefonaktiebolaget LM Ericsson ADR 8,229,045    47,235
  Apple Inc.   337,000    46,573
* Adobe Inc.   159,100    43,784
  Cisco Systems Inc.   973,100    38,924
* Keysight Technologies Inc.   168,600    26,531
  Corning Inc.   905,200    26,269
  Fidelity National Information Services Inc.   323,300    24,432
  Jabil Inc.   401,500    23,171
* PayPal Holdings Inc.   243,650    20,971
* WEX Inc.   152,080    19,305
  Mastercard Inc. Class A    52,900    15,042
  Teradyne Inc.   167,040    12,553
* Western Digital Corp.   354,400    11,536
* BlackBerry Ltd. 1,276,500     5,999
  NVIDIA Corp.    44,880     5,448
* Ciena Corp.    57,000     2,304
      2,102,033
Materials (2.1%)
  Albemarle Corp.   377,465    99,817
  Glencore plc 8,026,481    42,179
  DuPont de Nemours Inc.   331,300    16,698
  Corteva Inc.   285,193    16,299
  Freeport-McMoRan Inc.   383,200    10,473
  Dow Inc.   238,000    10,455
  Linde plc     9,200     2,480
  Greif Inc. Class B    25,000     1,520
        199,921
Real Estate (0.1%)
  American Homes 4 Rent Class A   222,000     7,284
Total Common Stocks
(Cost $4,960,150)
9,135,553
 
11

 

PRIMECAP Core Fund
    Shares Market
Value

($000)
Temporary Cash Investments (5.3%)
Money Market Fund (5.3%)
2 Vanguard Market Liquidity Fund, 2.828% (Cost$508,496) 5,086,599          508,508
Total Investments (100.1%) (Cost $5,468,646) 9,644,061
Other Assets and Liabilities—Net (-0.1%) (5,254)
Net Assets (100%) 9,638,807
Cost is in $000.
See Note A in Notes to Financial Statements.
* Non-income-producing security.
1 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 September 30, 2022, the aggregate value was $15,398,000, representing 0.2% of net assets.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
  ADR—American Depositary Receipt.
  GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
12

 

PRIMECAP Core Fund
Statement of Assets and Liabilities
As of September 30, 2022
($000s, except shares and per-share amounts) Amount
Assets  
Investments in Securities, at Value  
Unaffiliated Issuers (Cost $4,960,150) 9,135,553
Affiliated Issuers (Cost $508,496) 508,508
Total Investments in Securities 9,644,061
Investment in Vanguard 389
Receivables for Investment Securities Sold 2,249
Receivables for Accrued Income 11,515
Receivables for Capital Shares Issued 1,306
Total Assets 9,659,520
Liabilities  
Payables for Investment Securities Purchased 9,339
Payables to Investment Advisor 8,104
Payables for Capital Shares Redeemed 2,656
Payables to Vanguard 614
Total Liabilities 20,713
Net Assets 9,638,807
At September 30, 2022, net assets consisted of:  
   
Paid-in Capital 4,719,840
Total Distributable Earnings (Loss) 4,918,967
Net Assets 9,638,807
 
Net Assets  
Applicable to 363,915,476 outstanding $.001 par value shares of
beneficial interest (unlimited authorization)
9,638,807
Net Asset Value Per Share $26.49
  
See accompanying Notes, which are an integral part of the Financial Statements.
13

 

PRIMECAP Core Fund
Statement of Operations
  Year Ended
September 30, 2022
  ($000)
Investment Income  
Income  
Dividends1 172,270
Interest2 4,109
Securities Lending—Net 70
Total Income 176,449
Expenses  
Investment Advisory Fees—Note B 35,174
The Vanguard Group—Note C  
Management and Administrative 16,166
Marketing and Distribution 697
Custodian Fees 309
Auditing Fees 27
Shareholders’ Reports 74
Trustees’ Fees and Expenses 4
Other Expenses 14
Total Expenses 52,465
Net Investment Income 123,984
Realized Net Gain (Loss)  
Investment Securities Sold2 682,000
Foreign Currencies 4
Realized Net Gain (Loss) 682,004
Change in Unrealized Appreciation (Depreciation)  
Investment Securities2 (2,632,306)
Foreign Currencies (191)
Change in Unrealized Appreciation (Depreciation) (2,632,497)
Net Increase (Decrease) in Net Assets Resulting from Operations (1,826,509)
1 Dividends are net of foreign withholding taxes of $3,407,000.
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 $4,109,000, ($59,000), $10,000, and ($83,000), respectively. Purchases and sales are for temporary cash investment purposes.
  
See accompanying Notes, which are an integral part of the Financial Statements.
14

 

PRIMECAP Core Fund
Statement of Changes in Net Assets