N-CSR 1 malvern_final.htm malvern_final.htm - Generated by SEC Publisher for SEC Filing

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: 811-05628

Name of Registrant: Vanguard Malvern 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, 2017 – September 30, 2018

Item 1: Reports to Shareholders



Annual Report | September 30, 2018

Vanguard U.S. Value Fund


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 3
Advisor’s Report. 5
Fund Profile. 7
Performance Summary. 8
Financial Statements. 10
Your Fund’s After-Tax Returns. 24
About Your Fund’s Expenses. 25
Glossary. 27

 

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.

See the Glossary for definitions of investment terms used in this report.


 

Your Fund’s Performance at a Glance

• Vanguard U.S. Value Fund returned more than 10% for the 12 months ended September 30, 2018, a bit ahead of both its benchmark index and the average return of its peer group.

• The broad U.S. stock market returned more than 17% as corporate earnings remained strong and the U.S. economy continued to show signs of growth. Stocks endured a stretch of volatility in the first quarter of 2018 before rebounding.

• Growth stocks outperformed their value brethren, and large- and small-capitalization stocks generally surpassed mid-caps.

• Your fund’s stock selection model generated broad-based performance. The model focuses on five signals that rank a universe of stocks. Four of those signals—valuation, growth, sentiment, and management decisions—contributed to relative performance.

• Energy, health care, and information technology stocks contributed most to relative returns, while consumer staples, telecommunication services, and real estate stocks detracted most.

Total Returns: Fiscal Year Ended September 30, 2018  
  Total
  Returns
Vanguard U.S. Value Fund 10.22%
Russell 3000 Value Index 9.46
Multi-Cap Value Funds Average 9.60
Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  
 
 
Total Returns: Ten Years Ended September 30, 2018  
  Average
  Annual Return
U.S. Value Fund 10.09%
Russell 3000 Value Index 9.76
Multi-Cap Value Funds Average 9.49
Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  

 

The figures shown represent past performance, which is not a guarantee of future results. (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.

1


 

Expense Ratios    
Your Fund Compared With Its Peer Group    
    Peer Group
  Fund Average
U.S. Value Fund 0.23% 1.06%

 

The fund expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the fund’s expense ratio was 0.22%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.

Peer group: Multi-Cap Value Funds.

2


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

Over the years, I’ve found that prudent investors exhibit a common trait: discipline. No matter how the markets move or what new investing fad hits the headlines, those who stay focused on their goals and tune out the noise are set up for long-term success.

The prime gateway to investing is saving, and you don’t usually become a saver without a healthy dose of discipline. Savers make the decision to sock away part of their income, which means spending less and delaying gratification, no matter how difficult that may be.

Of course, disciplined investing extends beyond diligent saving. The financial markets, in the short term especially, are unpredictable; I have yet to meet the investor who can time them perfectly. It takes discipline to resist the urge to go all-in when markets are frothy or to retreat when things look bleak.

Staying put with your investments is one strategy for handling volatility. Another, rebalancing, requires even more discipline because it means steering your money away from strong performers and toward poorer performers.

Patience—a form of discipline—is also the friend of long-term investors. Higher returns are the potential reward for weathering the market’s turbulence and uncertainty.

3


 

We have been enjoying one of the longest bull markets in history, but it won’t continue forever. Prepare yourself now for how you will react when volatility comes back. Don’t panic. Don’t chase returns or look for answers outside the asset classes you trust. And be sure to rebalance periodically, even when there’s turmoil.

Whether you’re a master of self-control, get a boost from technology, or work with a professional advisor, know that discipline

is necessary to get the most out of your investment portfolio. And know that Vanguard is with you for the entire ride.

Thank you for your continued loyalty.


Mortimer J. Buckley

President and Chief Executive Officer

October 18, 2018

Market Barometer      
    Average Annual Total Returns
  Periods Ended September 30, 2018
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) 17.76% 17.07% 13.67%
Russell 2000 Index (Small-caps) 15.24 17.12 11.07
Russell 3000 Index (Broad U.S. market) 17.58 17.07 13.46
FTSE All-World ex US Index (International) 2.13 10.18 4.51
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.22% 1.31% 2.16%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 0.35 2.24 3.54
FTSE Three-Month U. S. Treasury Bill Index 1.57 0.80 0.48
 
CPI      
Consumer Price Index 2.28% 1.99% 1.52%

 

4


 

Advisor’s Report

For the 12 months ended September 30, 2018, Vanguard U.S. Value Fund returned more than 10%, ahead of its benchmark index, the Russell 3000 Value Index, which returned over 9%. It also slightly outperformed the average return of its peer group.

Investment environment

United States gross domestic product (GDP) grew at annual rate of 4.2% in the second quarter of 2018, powered by a rebound in consumer spending, exports, and business investment. The unemployment rate declined to 3.7% in September, and total nonfarm payroll employment increased by 134,000. Job gains occurred in professional and business services, in health care, and in transportation and warehousing.

In its September meeting, the Federal Reserve increased interest rates by 25 basis points to a target range of 2.00% to 2.25%. Along with the rate increase, the Fed projected one more hike before the end of the year and three in 2019. In June, the European Central Bank (ECB) announced plans to end bond purchases at the end of the year and keep interest rates at record low levels at least through the summer of 2019. The ECB also confirmed it will halve bond purchases to 15 billion euros ($17.4 billion) per month in the fourth quarter.

Over the period, the broad U.S. equity market, as measured by the Russell 3000 Index, returned more than 17%. U.S. stock market performance was broad-based; most market sectors advanced, led by

information technology, consumer discretionary, and health care. Growth stocks outperformed their value counterparts, small- and large-capitalization stocks outpaced small-caps, and U.S. stocks outpaced their international brethren. Developed Pacific markets surpassed emerging markets and developed European markets.

Investment objective and strategy

Although it’s important to understand how overall performance is affected by the macroeconomic factors we’ve described, our strategy focuses on company-specific fundamentals—not technical analysis. Our stock selection model evaluates companies within our investment universe to identify those with attractive characteristics that we believe will outperform over the long run.

To do this, we use a strict quantitative process that focuses on a combination of five key themes: high quality—healthy balance sheets and consistent cash-flow generation; effective use of capital by management—sound investment policies that favor internal over external funding; consistent earnings growth—a demonstrated ability to grow earnings year after year; strong market sentiment—market confirmation of our view; and reasonable valuation—avoidance of overpriced stocks.

The interaction of these themes generates an opinion on all the stocks in our universe each day. Using the results of our model, we then construct our portfolio with the

5


 

goal of maximizing expected return, while minimizing exposure to risks that our research indicates do not improve returns, such as industry selection and other risks relative to our benchmark.

Our successes and failures

The fund’s outperformance was driven by our sentiment and growth signals. The valuation and management decisions signals contributed to a lesser degree, while our quality signal detracted significantly.

Results exceeded or equaled the benchmark in almost all sectors. The top relative performer was energy, followed by health care and information technology. Consumer staples, telecommunication services, and real estate were the weakest relative performers.

The portfolio benefited from Advanced Micro Devices in information technology, Denbury Resources and W&T Offshore in energy, and WellCare Health Plans in health care, as well as an underweighted allocation to General Electric in industrials. The greatest shortfalls came from PG&E in utilities, Sanderson Farms in consumer staples, and Unum Group in financials, along with underweighted allocations to Cisco Systems and Intel in information technology.

Portfolio Managers:

James P. Stetler

Binbin Guo, Principal,

Head of Alpha Equity Investments

Vanguard Quantitative Equity Group

October 18, 2018

6


 

U.S. Value Fund

Fund Profile
As of September 30, 2018

Portfolio Characteristics    
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 255 2,113 3,825
Median Market Cap $34.2B $58.1B $73.9B
Price/Earnings Ratio 15.3x 16.3x 21.0x
Price/Book Ratio 2.2x 2.0x 3.1x
Return on Equity 11.3% 11.6% 14.9%
Earnings Growth Rate 4.7% 5.7% 8.5%
Dividend Yield 2.1% 2.3% 1.7%
Foreign Holdings 0.0% 0.0% 0.0%
Turnover Rate 75%
Ticker Symbol VUVLX
Expense Ratio1 0.23%
30-Day SEC Yield 1.87%
Short-Term Reserves -0.1%

 

Sector Diversification (% of equity exposure)
  Fund
Consumer Discretionary 8.3%
Consumer Staples 6.7
Energy 10.7
Financials 23.1
Health Care 14.8
Industrials 8.5
Information Technology 10.1
Materials 3.7
Real Estate 5.2
Telecommunication Services 3.3
Utilities 5.6

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.

 

 

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.95 0.84
Beta 1.07 1.03

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

Ten Largest Holdings (% of total net assets)
JPMorgan Chase & Co. Diversified Banks 3.1%
Pfizer Inc. Pharmaceuticals 2.2
Chevron Corp. Integrated Oil & Gas 2.2
Berkshire Hathaway Inc. Multi-Sector Holdings 2.0
Exxon Mobil Corp. Integrated Oil & Gas 1.9
Johnson & Johnson Pharmaceuticals 1.8
AT&T Inc. Integrated  
  Telecommunication  
  Services 1.8
Bank of America Corp. Diversified Banks 1.7
Merck & Co. Inc. Pharmaceuticals 1.5
Intel Corp. Semiconductors 1.5
Top Ten   19.7%

The holdings listed exclude any temporary cash investments and equity index products.

 

Investment Focus


1 The expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the expense ratio was 0.22%.

7


 

U.S. Value 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, 2008, Through September 30, 2018
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended September 30, 2018  
        Final Value
  One Five Ten of a $10,000
  Year Years Years Investment
U.S. Value Fund* 10.22% 11.33% 10.09% $26,154
Russell 3000 Value Index 9.46 10.65 9.76 25,383
Multi-Cap Value Funds Average 9.60 9.54 9.49 24,763
Dow Jones U.S. Total Stock Market        
Float Adjusted Index 17.58 13.42 12.05 31,191

 

Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

See Financial Highlights for dividend and capital gains information.

8


 

U.S. Value Fund

Fiscal-Year Total Returns (%): September 30, 2008, Through September 30, 2018


9


 

U.S. Value Fund

Financial Statements

Statement of Net Assets
As of September 30, 2018

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value
    Shares ($000)
Common Stocks (99.5%)1    
Consumer Discretionary (8.2%)  
  Comcast Corp. Class A 294,371 10,424
* Liberty Media Corp-Liberty    
  SiriusXM Class A 228,503 9,926
  Darden Restaurants Inc. 81,725 9,087
* Weight Watchers    
  International Inc. 116,666 8,399
* Deckers Outdoor Corp. 69,282 8,215
  New York Times Co.    
  Class A 346,317 8,017
  Tailored Brands Inc. 300,150 7,561
* Urban Outfitters Inc. 175,944 7,196
  Lear Corp. 49,519 7,180
^ Sirius XM Holdings Inc. 1,117,139 7,060
  Las Vegas Sands Corp. 114,758 6,809
* Crocs Inc. 311,837 6,639
  Abercrombie & Fitch Co. 279,499 5,903
  Best Buy Co. Inc. 73,952 5,869
  Walt Disney Co. 48,896 5,718
  Ralph Lauren Corp. Class A 30,562 4,204
  Dine Brands Global Inc. 45,528 3,702
* Madison Square    
  Garden Co. Class A 8,789 2,771
* Visteon Corp. 24,759 2,300
  McDonald’s Corp. 13,406 2,243
* Stoneridge Inc. 69,859 2,076
  AMC Entertainment    
  Holdings Inc. Class A 90,166 1,848
  Aptiv plc 16,984 1,425
* Modine Manufacturing Co. 47,761 712
  Winnebago Industries Inc. 20,611 683
* American Public Education    
  Inc. 19,814 655
* Fossil Group Inc. 24,750 576
*,^ Conn’s Inc. 14,150 500
  PulteGroup Inc. 18,348 455
* Denny’s Corp. 30,377 447

 

      Market
      Value
    Shares ($000)
* Cambium Learning    
  Group Inc. 34,779 412
  Johnson Outdoors Inc.    
  Class A 3,564 331
      139,343
Consumer Staples (6.6%)    
  Procter & Gamble Co. 199,976 16,644
  Archer-Daniels-Midland Co. 233,900 11,758
  Kroger Co. 380,375 11,073
  PepsiCo Inc. 90,422 10,109
  Lamb Weston Holdings Inc. 142,826 9,512
* Herbalife Nutrition Ltd. 163,079 8,896
  Conagra Brands Inc. 216,796 7,364
* US Foods Holding Corp. 226,491 6,980
  Walmart Inc. 74,174 6,966
  Philip Morris International    
  Inc. 77,177 6,293
  Nu Skin Enterprises Inc.    
  Class A 62,133 5,121
  Cal-Maine Foods Inc. 85,906 4,149
  Tyson Foods Inc. Class A 69,557 4,141
* Simply Good Foods Co. 90,159 1,754
  JM Smucker Co. 8,488 871
* Chefs’ Warehouse Inc. 13,531 492
  Flowers Foods Inc. 22,608 422
      112,545
Energy (10.7%)    
  Chevron Corp. 299,882 36,669
  Exxon Mobil Corp. 382,516 32,521
  ConocoPhillips 264,127 20,443
  Occidental Petroleum    
  Corp. 191,163 15,708
  Valero Energy Corp. 134,539 15,304
  PBF Energy Inc. Class A 209,550 10,459
* Whiting Petroleum Corp. 184,858 9,805
  HollyFrontier Corp. 134,502 9,402
* Denbury Resources Inc. 1,415,317 8,775
* Continental Resources Inc. 128,335 8,763

 

10


 

U.S. Value Fund

      Market
      Value
    Shares ($000)
* W&T Offshore Inc. 591,555 5,703
  Phillips 66 27,425 3,091
* California Resources Corp. 57,278 2,780
  Schlumberger Ltd. 26,099 1,590
      181,013
Financials (22.9%)    
  JPMorgan Chase & Co. 469,623 52,992
* Berkshire Hathaway Inc.    
  Class B 156,952 33,605
  Bank of America Corp. 980,304 28,880
  Wells Fargo & Co. 343,335 18,046
  Aflac Inc. 299,721 14,108
  Morgan Stanley 290,457 13,527
  Capital One Financial Corp. 138,994 13,195
  Allstate Corp. 130,313 12,862
  Citigroup Inc. 170,436 12,227
  SunTrust Banks Inc. 179,624 11,997
  Regions Financial Corp. 614,456 11,275
  T. Rowe Price Group Inc. 93,716 10,232
  Fifth Third Bancorp 363,719 10,155
  Citizens Financial Group Inc. 260,476  10,047
  Comerica Inc. 110,027 9,924
  Torchmark Corp. 111,509 9,667
  Ally Financial Inc. 359,583 9,511
* SVB Financial Group 27,770 8,632
  Zions Bancorporation 169,442 8,497
  CME Group Inc. 47,279 8,047
* E*TRADE Financial Corp. 153,341 8,034
  TCF Financial Corp. 335,346 7,985
  Ameriprise Financial Inc. 54,042 7,980
  Universal Insurance    
  Holdings Inc. 162,706 7,899
  Unum Group 160,881 6,286
  Popular Inc. 107,904 5,530
  Kemper Corp. 57,467 4,623
  Santander Consumer USA    
  Holdings Inc. 129,783 2,601
  Bank of NT Butterfield &    
  Son Ltd. 48,605 2,521
  Alleghany Corp. 3,703 2,416
  MetLife Inc. 48,340 2,258
  Goldman Sachs Group Inc. 9,508 2,132
  Hanover Insurance Group    
  Inc. 16,822 2,075
  Greenhill & Co. Inc. 76,020 2,003
  Assured Guaranty Ltd. 45,620 1,927
  OFG Bancorp 113,403 1,831
* Axos Financial Inc. 43,873 1,509
  Federal Agricultural    
  Mortgage Corp. 18,311 1,322
  Primerica Inc. 10,922 1,317
  BB&T Corp. 25,620 1,244
* Blucora Inc. 27,421 1,104
* Enova International Inc. 37,962 1,093
  US Bancorp 15,262 806

 

  Brown & Brown Inc. 25,040 740
* MBIA Inc. 68,074 728
  First American Financial    
  Corp. 11,417 589
  BankUnited Inc. 16,023 567
  Nelnet Inc. Class A 9,310 532
  Fidelity National Financial    
  Inc. 12,681 499
* On Deck Capital Inc. 50,527 382
* Ambac Financial Group Inc. 17,704 361
  Hamilton Lane Inc. Class A 7,676 340
      388,660
Health Care (14.7%)    
  Pfizer Inc. 832,727 36,698
  Johnson & Johnson 220,594 30,479
  Merck & Co. Inc. 362,941 25,747
  Anthem Inc. 66,774 18,299
  Bristol-Myers Squibb Co. 242,227 15,037
  Cigna Corp. 64,754 13,485
  Abbott Laboratories 181,567 13,320
  Humana Inc. 31,117 10,534
* WellCare Health Plans Inc. 32,675 10,472
* Haemonetics Corp. 88,419 10,131
  HCA Healthcare Inc. 67,342 9,369
* Molina Healthcare Inc. 57,786 8,593
* IQVIA Holdings Inc. 46,495 6,032
* Express Scripts Holding Co. 58,494 5,558
* Enanta Pharmaceuticals Inc. 61,561 5,261
  Medtronic plc 52,587 5,173
  Baxter International Inc. 55,288 4,262
  Amgen Inc. 16,037 3,324
* REGENXBIO Inc. 40,515 3,059
* CareDx Inc. 82,979 2,394
* Medpace Holdings Inc. 35,233 2,111
* Centene Corp. 14,316 2,073
* Spectrum Pharmaceuticals    
  Inc. 108,777 1,827
* ArQule Inc. 207,601 1,175
* PTC Therapeutics Inc. 19,894 935
* MacroGenics Inc. 34,537 741
* Acorda Therapeutics Inc. 31,862 626
  Thermo Fisher Scientific Inc. 2,130 520
* Triple-S Management Corp.    
  Class B 26,102 493
* Endo International plc 22,794 384
* Avanos Medical Inc. 5,155 353
      248,465
Industrials (8.5%)    
  Lockheed Martin Corp. 29,453 10,189
  Raytheon Co. 49,101 10,147
  WW Grainger Inc. 28,276 10,106
  SkyWest Inc. 169,951 10,010
  Caterpillar Inc. 65,272 9,953
* HD Supply Holdings Inc. 208,755 8,933
* United Rentals Inc. 53,548 8,760

 

11


 

U.S. Value Fund

      Market
      Value
    Shares ($000)
  Terex Corp. 218,143 8,706
  Honeywell International Inc. 41,112 6,841
* FTI Consulting Inc. 67,998 4,977
* United Continental    
  Holdings Inc. 52,106 4,640
  Quad/Graphics Inc. 202,916 4,229
  ArcBest Corp. 84,142 4,085
^ ADT Inc. 428,725 4,026
  Spirit AeroSystems    
  Holdings Inc. Class A 36,548 3,350
  United Technologies Corp. 20,867 2,917
  General Electric Co. 247,254 2,791
*,^ Enphase Energy Inc. 537,254 2,606
  GrafTech International Ltd. 131,808 2,572
* Vicor Corp. 55,778 2,566
  Global Brass & Copper    
  Holdings Inc. 60,757 2,242
  Expeditors International of    
  Washington Inc. 30,014 2,207
  Harris Corp. 12,414 2,101
  Allison Transmission    
  Holdings Inc. 32,313 1,681
* XPO Logistics Inc. 13,811 1,577
* Harsco Corp. 54,845 1,566
  Union Pacific Corp. 8,452 1,376
* Meritor Inc. 69,335 1,342
  Delta Air Lines Inc. 21,576 1,248
  Schneider National Inc.    
  Class B 40,390 1,009
  PACCAR Inc. 13,678 933
  Heidrick & Struggles    
  International Inc. 27,371 926
  DMC Global Inc. 22,273 909
* Textainer Group Holdings    
  Ltd. 66,932 857
  Insteel Industries Inc. 11,168 401
* BMC Stock Holdings Inc. 17,542 327
* Echo Global Logistics Inc. 10,242 317
      143,423
Information Technology (10.0%)  
  Intel Corp. 525,848 24,867
  Cisco Systems Inc. 373,716 18,181
  HP Inc. 572,066 14,742
  QUALCOMM Inc. 162,749 11,723
  Microsoft Corp. 95,970 10,976
  Booz Allen Hamilton    
  Holding Corp. Class A 202,924 10,071
* Advanced Micro Devices    
  Inc. 313,060 9,670
  NetApp Inc. 107,139 9,202
  CDW Corp. 87,054 7,741
* CACI International Inc.    
  Class A 41,486 7,640
  Oracle Corp. 125,160 6,453
* VMware Inc. Class A 41,256 6,438

 

* ON Semiconductor Corp. 332,688 6,132
* Electro Scientific Industries    
  Inc. 257,984 4,502
  Hewlett Packard Enterprise    
  Co. 185,142 3,020
* Glu Mobile Inc. 368,621 2,746
* Unisys Corp. 128,390 2,619
* SMART Global Holdings    
  Inc. 86,156 2,476
  ManTech International Corp.    
  Class A 32,645 2,067
* Dell Technologies Inc.    
  Class V 20,691 2,010
  Comtech    
  Telecommunications Corp. 48,147 1,746
* Micron Technology Inc. 25,554 1,156
* Insight Enterprises Inc. 20,187 1,092
* eGain Corp. 126,191 1,022
* Cardtronics plc Class A 12,970 410
  PC Connection Inc. 9,593 373
      169,075
Materials (3.8%)    
  CF Industries Holdings Inc. 210,225 11,445
  Freeport-McMoRan Inc. 764,977 10,648
  Huntsman Corp. 293,377 7,989
  DowDuPont Inc. 120,699 7,762
  LyondellBasell Industries    
  NV Class A 58,380 5,985
  Warrior Met Coal Inc. 220,042 5,950
  Louisiana-Pacific Corp. 204,951 5,429
  Westlake Chemical Corp. 56,069 4,660
* Alcoa Corp. 49,373 1,995
  Boise Cascade Co. 37,017 1,362
* Verso Corp. 10,524 354
* Cleveland-Cliffs Inc. 26,534 336
      63,915
Real Estate (5.2%)    
  Weyerhaeuser Co. 343,941 11,099
  Xenia Hotels & Resorts    
  Inc. 402,120 9,530
  Park Hotels & Resorts Inc. 283,584 9,307
  Jones Lang LaSalle Inc. 63,131 9,111
  Prologis Inc. 132,120 8,956
  Spirit Realty Capital Inc. 1,032,013 8,318
  Rayonier Inc. 232,520 7,862
  CubeSmart 177,101 5,053
*,^ Forestar Group Inc. 215,108 4,560
  Pebblebrook Hotel Trust 111,197 4,044
  CorEnergy Infrastructure    
  Trust Inc. 91,941 3,455
* CBRE Group Inc. Class A 65,808 2,902
  Hersha Hospitality Trust    
  Class A 55,726 1,263
  NorthStar Realty Europe    
  Corp. 68,919 976

 

12


 

U.S. Value Fund

      Market
      Value
    Shares ($000)
  Hospitality Properties Trust 22,662 654
  Uniti Group Inc. 29,899 603
      87,693
Telecommunication Services (3.3%)  
  AT&T Inc. 881,815 29,612
  Verizon Communications    
  Inc. 283,182 15,119
* T-Mobile US Inc. 72,902 5,116
^ Frontier Communications    
  Corp. 371,541 2,411
  Telephone & Data Systems    
  Inc. 70,233 2,137
* United States Cellular Corp. 20,817 932
  ATN International Inc. 4,927 364
      55,691
Utilities (5.6%)    
  NextEra Energy Inc. 113,785 19,070
  Exelon Corp. 347,380 15,167
  FirstEnergy Corp. 331,921 12,338
  NRG Energy Inc. 317,967 11,892
  Entergy Corp. 136,932 11,109
  AES Corp. 715,240 10,013
* Vistra Energy Corp. 319,462 7,948
* Clearway Energy Inc.    
  Class C 174,982 3,368
  National Fuel Gas Co. 34,775 1,950
  Otter Tail Corp. 19,101 915
* Clearway Energy Inc.    
  Class A 31,020 591
      94,361
Total Common Stocks    
(Cost $1,374,307)   1,684,184
Temporary Cash Investments (1.2%)1  
Money Market Fund (1.1%)    
2,3 Vanguard Market Liquidity    
  Fund, 2.209% 191,918 19,192
 
    Face  
    Amount  
    ($000)  
U. S. Government and Agency Obligations (0.1%)
4 United States Treasury Bill,    
  1.962%, 10/11/18 202 202
4 United States Treasury Bill,    
  2.078%, 11/15/18 400 399
      601
Total Temporary Cash Investments  
(Cost $19,792)   19,793
Total Investments (100.7%)    
(Cost $1,394,099)   1,703,977

 

  Amount
  ($000)
Other Assets and Liabilities (-0.7%)  
Other Assets  
Investment in Vanguard 87
Receivables for Investment Securities Sold 61,722
Receivables for Accrued Income 1,525
Receivables for Capital Shares Issued 1,109
Other Assets 59
Total Other Assets 64,502
Liabilities  
Payables for Investment Securities  
Purchased (60,066)
Collateral for Securities on Loan (14,218)
Payables for Capital Shares Redeemed (1,095)
Payables to Vanguard (1,093)
Variation Margin Payable—Futures  
Contracts (3)
Total Liabilities (76,475)
Net Assets (100%)  
Applicable to 84,475,233 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 1,692,004
Net Asset Value Per Share $20.03

 

13


 

U.S. Value Fund

At September 30, 2018, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 1,289,507
Undistributed Net Investment Income 21,478
Accumulated Net Realized Gains 71,149
Unrealized Appreciation (Depreciation)  
Investment Securities 309,878
Futures Contracts (8)
Net Assets 1,692,004

 

See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers.
The total value of securities on loan is $12,939,000.
1 The fund invests a portion of its cash reserves in equity
markets through the use of index futures contracts. After
giving effect to futures investments, the fund’s effective
common stock and temporary cash investment positions
represent 100.0% and 0.7%, respectively, 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.
3 Includes $14,218,000 of collateral received for securities
on loan.
4 Securities with a value of $419,000 have been segregated as
initial margin for open futures contracts.

Derivative Financial Instruments Outstanding as of Period End    
 
Futures Contracts        
        ($000)
        Value and
    Number of   Unrealized
    Long (Short) Notional Appreciation
  Expiration Contracts Amount (Depreciation)
Long Futures Contracts        
E-mini S&P 500 Index December 2018 51 7,443 (8)

 

See accompanying Notes, which are an integral part of the Financial Statements.

14


 

U.S. Value Fund  
 
 
Statement of Operations  
 
  Year Ended
  September 30, 2018
  ($000)
Investment Income  
Income  
Dividends 35,730
Interest1 114
Securities Lending—Net 278
Total Income 36,122
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 1,077
Management and Administrative 2,272
Marketing and Distribution 276
Custodian Fees 27
Auditing Fees 32
Shareholders’ Reports and Proxy 35
Trustees’ Fees and Expenses 1
Total Expenses 3,720
Net Investment Income 32,402
Realized Net Gain (Loss)  
Investment Securities Sold1 80,175
Futures Contracts 1,333
Realized Net Gain (Loss) 81,508
Change in Unrealized Appreciation (Depreciation)  
Investment Securities1 50,928
Futures Contracts (62)
Change in Unrealized Appreciation (Depreciation) 50,866
Net Increase (Decrease) in Net Assets Resulting from Operations 164,776

 

1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $100,000, $1,000, and ($2,000), respectively. Purchases and sales are for temporary cash investment purposes.

See accompanying Notes, which are an integral part of the Financial Statements.

15


 

U.S. Value Fund    
 
 
Statement of Changes in Net Assets    
 
  Year Ended September 30,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 32,402 36,922
Realized Net Gain (Loss) 81,508 100,791
Change in Unrealized Appreciation (Depreciation) 50,866 109,876
Net Increase (Decrease) in Net Assets Resulting from Operations 164,776 247,589
Distributions    
Net Investment Income (32,253) (30,933)
Realized Capital Gain1 (97,416) (22,230)
Total Distributions (129,669) (53,163)
Capital Share Transactions    
Issued 214,440 422,683
Issued in Lieu of Cash Distributions 121,791 50,256
Redeemed (354,645) (365,711)
Net Increase (Decrease) from Capital Share Transactions (18,414) 107,228
Total Increase (Decrease) 16,693 301,654
Net Assets    
Beginning of Period 1,675,311 1,373,657
End of Period2 1,692,004 1,675,311

 

1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $22,953,000 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $21,478,000 and $23,033,000.

See accompanying Notes, which are an integral part of the Financial Statements.

16


 

U.S. Value Fund          
 
 
Financial Highlights          
 
 
For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $19.63 $17.25 $16.48 $16.95 $14.41
Investment Operations          
Net Investment Income . 3731 .4371 .440 .355 .299
Net Realized and Unrealized Gain (Loss)          
on Investments 1.563 2.606 1.341 (.543) 2.531
Total from Investment Operations 1.936 3.043 1.781 (.188) 2.830
Distributions          
Dividends from Net Investment Income (. 382) (. 386) (. 358) (. 282) (. 290)
Distributions from Realized Capital Gains (1.154) (.277) (.653)
Total Distributions (1.536) (.663) (1.011) (.282) (.290)
Net Asset Value, End of Period $20.03 $19.63 $17.25 $16.48 $16.95
 
Total Return2 10.22% 17.87% 11.09% -1.18% 19.89%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $1,692 $1,675 $1,374 $1,215 $1,117
Ratio of Total Expenses to Average Net Assets 0.22% 0.23% 0.23% 0.26% 0.29%
Ratio of Net Investment Income to          
Average Net Assets 1.92% 2.36% 2.63% 2.10% 1.92%
Portfolio Turnover Rate 75% 95% 76% 66% 57%

 

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.

See accompanying Notes, which are an integral part of the Financial Statements.

17


 

U.S. Value Fund

Notes to Financial Statements

Vanguard U.S. Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the 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 assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.

Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets 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 futures gains (losses).

During the year ended September 30, 2018, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2015–2018), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.

18


 

U.S. Value Fund

5. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.

6. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees 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 this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at September 30, 2018, or at any time during the period then ended.

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of

19


 

U.S. Value Fund

operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets. All other costs of operations payable to Vanguard 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, 2018, the fund had contributed to Vanguard capital in the amount of $87,000, representing 0.01% of the fund’s net assets and 0.03% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1Quoted prices in active markets for identical securities.

Level 2Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.

The following table summarizes the market value of the fund’s investments as of September 30, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 1,684,184
Temporary Cash Investments 19,192 601
Futures Contracts—Liabilities1 (3)
Total 1,703,373 601
1 Represents variation margin on the last day of the reporting period.      

 

D. 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, the

following permanent differences primarily attributable to the accounting for distributions in  
connection with fund share redemptions were reclassified to the following accounts:  
  Amount
  ($000)
Paid-in Capital 6,009
Undistributed (Overdistributed) Net Investment Income (1,704)
Accumulated Net Realized Gains (Losses) (4,305)

 

20


 

U.S. Value Fund

Temporary differences between book-basis and tax-basis components of accumulated net earnings (losses) 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 tax deferral of losses on wash sales and the realization of unrealized gains or losses on certain futures contracts. As of period end, the tax-basis components of accumulated net earnings (losses) are detailed in the table as follows:

  Amount
  ($000)
Undistributed Ordinary Income 22,412
Undistributed Long-Term Gains 71,142
Capital Loss Carryforwards (Non-expiring)
Net Unrealized Gains (Losses) 309,878

 

As of September 30, 2018, 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 1,394,099
Gross Unrealized Appreciation 345,418
Gross Unrealized Depreciation (35,540)
Net Unrealized Appreciation (Depreciation) 309,878

 

E. During the year ended September 30, 2018, the fund purchased $1,253,681,000 of investment securities and sold $1,365,282,000 of investment securities, other than temporary cash investments.

F. Capital shares issued and redeemed were:    
  Year Ended September 30,
  2018 2017
  Shares Shares
  (000) (000)
Issued 11,008 22,746
Issued in Lieu of Cash Distributions 6,353 2,714
Redeemed (18,245) (19,713)
Net Increase (Decrease) in Shares Outstanding (884) 5,747

 

G. Management has determined that no events or transactions occurred subsequent to September 30, 2018, that would require recognition or disclosure in these financial statements.

21


 

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Vanguard Malvern Funds and Shareholders of Vanguard U.S. Value Fund

Opinion on the Financial Statements

We have audited the accompanying statement of net assets of Vanguard U.S. Value Fund (one of the funds constituting Vanguard Malvern Funds, referred to hereafter as the “Fund”) as of September 30, 2018, the related statement of operations for the year ended September 30, 2018, the statement of changes in net assets for each of the two years in the period ended September 30, 2018, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2018 (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, 2018, 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, 2018 and the financial highlights for each of the five years in the period ended September 30, 2018 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, 2018 by correspondence with the custodians and brokers and by agreement to the underlying ownership records of the transfer agent; 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 15, 2018

We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.

22


 

Special 2018 tax information (unaudited) for Vanguard U.S. Value Fund

This information for the fiscal year ended September 30, 2018, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $78,768,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.

For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.

The fund distributed $30,624,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 97.5% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

23


 

Your Fund’s After-Tax Returns

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2018. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

Average Annual Total Returns: U.S. Value Fund      
Periods Ended September 30, 2018      
  One Five Ten
  Year Years Years
Returns Before Taxes 10.22% 11.33% 10.09%
Returns After Taxes on Distributions 7.97 10.18 9.33
Returns After Taxes on Distributions and Sale of Fund Shares 7.03 8.80 8.17

 

24


 

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.

25


 

Six Months Ended September 30, 2018      
  Beginning Ending Expenses
  Account Value Account Value Paid During
U.S. Value Fund 3/31/2018 9/30/2018 Period
Based on Actual Fund Return $1,000.00 $1,074.57 $1.09
Based on Hypothetical 5% Yearly Return 1,000.00 1,024.02 1.07

 

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 0.21%. 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).

26


 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share.

For a fund, the weighted average price/book ratio of the stocks it holds.

27


 

Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

28


 

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

29


 

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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 on an at-cost basis.

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 211 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 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. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

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. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.

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), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) 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 Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

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 LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.

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. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

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). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).


 

Executive Officers

Glenn Booraem

Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

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. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Joseph Brennan Chris D. McIsaac
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings

 

Chairman Emeritus and Senior Advisor

John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder

John C. Bogle
Chairman and Chief Executive Officer, 1974–1996


 

P.O. Box 2600
Valley Forge, PA 19482-2600

Connect with Vanguard® > vanguard.com

Fund Information > 800-662-7447

Direct Investor Account Services > 800-662-2739 Institutional Investor Services > 800-523-1036 Text Telephone for People Who Are Deaf or Hard of Hearing > 800-749-7273

This material may be used in conjunction with the offering of shares of any Vanguard fund only if preceded or accompanied by the fund’s current prospectus.

All comparative mutual fund data are from Lipper, a Thomson Reuters Company, or 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, 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 sec.gov.

You can review and copy information about your fund at the SEC’s Public Reference Room in Washington, D.C. To find out more about this public service, call the SEC at 202-551-8090. Information about your fund is also available on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request in either of two ways: via email addressed to publicinfo@sec.gov or via regular mail addressed to the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-1520.

Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2018, Bloomberg. All rights reserved.

© 2018 The Vanguard Group, Inc. All rights reserved.

Vanguard Marketing Corporation, Distributor.

Q1240 112018


Annual Report | September 30, 2018

Vanguard Capital Value Fund


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 3
Advisor’s Report. 5
Fund Profile. 8
Performance Summary. 9
Financial Statements. 11
Your Fund’s After-Tax Returns. 25
About Your Fund’s Expenses. 26
Glossary. 28

 

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.

See the Glossary for definitions of investment terms used in this report.


 

Your Fund’s Performance at a Glance

• Vanguard Capital Value Fund returned 8.48% for the 12 months ended September 30,
2018. It trailed its benchmark and the average return of its peers.

• The advisor’s strong selections in the consumer staples, real estate, industrial,
and consumer discretionary sectors helped relative returns.

• The fund’s holdings in health care, financials, and information technology lagged
their benchmark counterparts and detracted from results.

• The fund’s average annual return for the ten years ended September 30, 2018,
outpaced those of its benchmark and its peers.

Total Returns: Fiscal Year Ended September 30, 2018  
  Total
  Returns
Vanguard Capital Value Fund 8.48%
Russell 3000 Value Index 9.46
Multi-Cap Value Funds Average 9.60

 

Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Total Returns: Ten Years Ended September 30, 2018  
  Average
  Annual Return
Capital Value Fund 12.17%
Russell 3000 Value Index 9.76
Multi-Cap Value Funds Average 9.49

 

Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

The figures shown represent past performance, which is not a guarantee of future results. (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.

1


 

Expense Ratios    
Your Fund Compared With Its Peer Group    
    Peer Group
  Fund Average
Capital Value Fund 0.27% 1.06%

 

The fund expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the fund’s expense ratio was 0.29%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.

Peer group: Multi-Cap Value Funds.

2


 

CEO’s Perspective

 

 

Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

Over the years, I’ve found that prudent investors exhibit a common trait: discipline. No matter how the markets move or what new investing fad hits the headlines, those who stay focused on their goals and tune out the noise are set up for long-term success.

The prime gateway to investing is saving, and you don’t usually become a saver without a healthy dose of discipline. Savers make the decision to sock away part of their income, which means spending less and delaying gratification, no matter how difficult that may be.

Of course, disciplined investing extends beyond diligent saving. The financial markets, in the short term especially, are unpredictable; I have yet to meet the investor who can time them perfectly. It takes discipline to resist the urge to go all-in when markets are frothy or to retreat when things look bleak.

Staying put with your investments is one strategy for handling volatility. Another, rebalancing, requires even more discipline because it means steering your money away from strong performers and toward poorer performers.

Patience—a form of discipline—is also the friend of long-term investors. Higher returns are the potential reward for weathering the market’s turbulence and uncertainty.

3


 

We have been enjoying one of the longest bull markets in history, but it won’t continue forever. Prepare yourself now for how you will react when volatility comes back. Don’t panic. Don’t chase returns or look for answers outside the asset classes you trust. And be sure to rebalance periodically, even when there’s turmoil.

Whether you’re a master of self-control, get a boost from technology, or work with a professional advisor, know that discipline

is necessary to get the most out of your investment portfolio. And know that Vanguard is with you for the entire ride.

Thank you for your continued loyalty.


Mortimer J. Buckley
President and Chief Executive Officer
October 18, 2018

Market Barometer      
    Average Annual Total Returns
  Periods Ended September 30, 2018
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) 17.76% 17.07% 13.67%
Russell 2000 Index (Small-caps) 15.24 17.12 11.07
Russell 3000 Index (Broad U.S. market) 17.58 17.07 13.46
FTSE All-World ex US Index (International) 2.13 10.18 4.51
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.22% 1.31% 2.16%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 0.35 2.24 3.54
FTSE Three-Month U. S. Treasury Bill Index 1.57 0.80 0.48
 
CPI      
Consumer Price Index 2.28% 1.99% 1.52%

 

4


 

Advisor’s Report

For the 12 months ended September 30, 2018, Vanguard Capital Value Fund returned 8.48%, lagging its benchmark, the Russell 3000 Value Index.

Investment environment

Ten of the 11 sectors in the index posted positive absolute total returns. The information technology, health care, and energy sectors exceeded the overall benchmark return by a wide margin. All other sectors trailed the overall benchmark’s result, while the less-cyclical consumer staples sector was the only one to post a negative absolute total return.

We reduced the fund’s holdings in financials and consumer discretionary as we felt the benefits to their earnings from rising interest rates and consumer discretionary income were becoming well-appreciated by investors. We found more interesting value among companies with idiosyncratic challenges in other segments of the market. For example, we added to industrials, telecommunication services, energy, and materials, where we saw attractive risk-reward opportunities in specific stocks.

Our shortfalls

Our security selections were strongest in real estate, consumer staples, and industrials but proved more difficult in financials, health care, and information technology. Positive sector allocation, particularly overweighting information technology and underweighting financials, partially offset the weakness from stock selection.

Shares of British American Tobacco (BAT) were the fund’s largest detractors during the year, despite generally positive performance from consumer staples overall. BAT’s earnings growth trajectory slowed because of weakness in certain foreign currencies, including the Russian ruble, Brazilian real, and South African rand. However, most of the stock’s decline came from compression of the valuation investors placed on those earnings based on concerns over competitive threats from nontraditional entrants such as the e-cigarette maker JUUL.

The stock price of disk-drive and flash-memory producer Western Digital (WD) stumbled. Market participants sold out amid early evidence that the company’s extended string of above-normal earnings reports and guidance raises was coming to a cyclical end. While we were aware that the company’s profits would slide from their recent peak, the drop in valuation has been stunning.

At the time of this writing, WD shares traded for less than four times the earnings the company reported in the last 12 months through June 2018. By comparison, the Standard & Poor’s 500 Index stocks traded at almost 20 times their earnings for the same period. The collapse in profitability implied by that comparison is massive, even if WD’s stock is usually valued at some discount to the market at most points in the economic cycle. We believe the stock is significantly undervalued. It remains a holding in the

5


 

fund, although we recognize others may wait for earnings to bottom out and turn positive before returning.

Insurer MetLife also underperformed, despite benefiting from rising long-term interest rates. The company disclosed two material weaknesses (one of them unfavorable to prior reported earnings, the other favorable) in its accounting practices. The net effect was not large relative to shareholders’ equity or ongoing earnings prospects. We continue to hold the stock, although its valuation was hurt as the company’s internal controls were called into question.

Our successes

On the positive side, the timely purchase of grocery retailer Kroger in the face of rising competitive threats from Amazon, Walmart, and others made it the fund’s top contributor. (The decision to avoid struggling industrial conglomerate General Electric was actually even more favorable in terms of performance relative to the Russell 3000 Value Index.)

Kroger benefited nicely from the reduction in corporate tax rates, allowing the company to appease several of its constituencies. It let some earnings flow through to shareholders, some to workers in the form of higher wages and benefits, and a third portion to customers through targeted price reductions. Along with an uptick in same-store sales growth, these decisions helped improve investor sentiment about future earnings prospects, and the valuation increased accordingly.

Bermuda-based insurer XL Group was among the fund’s top contributors after the company agreed to a takeover approach from AXA, Europe’s second-largest insurance provider. Athletic apparel-maker Under Armour also appreciated strongly as the company made progress toward streamlining its product offering, improving its operations, and gaining more control over its cost structure. In both cases, our team felt the shares had reached a fair value, and the fund sold its holdings.

Fund positioning and outlook

At the end of September, the fund’s most significant overweightings relative to the Russell 3000 Value Index were in materials, real estate, energy, information technology, and industrials.

In industrials, we added holdings in Delta Air Lines and Southwest Airlines. Outsized capacity additions by competitor United Airlines spread worries of a market-share battle, particularly in some of Delta’s markets. Southwest also took a hit to its earnings in the aftermath of a tragic engine failure that caused the death of a passenger. Price cuts to attract passengers back following that accident, along with some struggles in implementing a new reservation system, caused difficult temporary revenue comparisons.

Airline earnings can be volatile, and their stocks have traded at sizable discounts to the broad market even during good times. However, we believe that both Delta and Southwest are in good positions to

6


 

generate and distribute high free cash flow to shareholders because of their clean balance sheets and controlled capital-spending plans.

In energy, we initiated positions in Chevron and Concho Resources. We believe that Chevron has an attractive free-cash-flow yield and dividend, as well as less country risk than other major oil companies. In Texas, Permian Basin producers have temporarily outgrown the available capacity of pipelines to transport oil and gas to the market. But we believe Concho is well-positioned to outperform over the longer term, particularly after announcing its agreement to acquire RSP Permian in an all-stock transaction. We believe this will boost future free-cash-flow generation.

The economy is moving at a steady clip. However, we recognize the potential for negative surprises, especially as a result of trade frictions with China, the lagging effect of interest rate hikes, Brexit, and other factors. The net result of purchases and sales during the year has moderately reduced the fund’s exposure—as measured by sector weights, market beta, financial leverage, and other metrics—to an unfavorable shift in expectations.

We will, as contrarian value investors, look to areas of the market characterized by investor unease and a wide range of potential outcomes as fertile fishing ponds for new ideas. We are focusing more intently today on companies with the potential to help themselves out of temporary difficulty rather than those needing a big boost from an accelerating economy. We appreciate the trust of the Capital Value Fund’s shareholders and believe that your confidence will be justified by the performance of the fund’s holdings over a full market cycle.

Respectfully,

David W. Palmer, CFA
Senior Managing Director
and Equity Portfolio Manager

Wellington Management Company llp

October 10, 2018

7


 

Capital Value Fund

Fund Profile
As of September 30, 2018

Portfolio Characteristics    
    Russell DJ
    3000 U.S. Total
    Value Market
  Fund Index FA Index
Number of Stocks 88 2,113 3,825
Median Market Cap $27.4B $58.1B $73.9B
Price/Earnings Ratio 13.0x 16.3x 21.0x
Price/Book Ratio 1.8x 2.0x 3.1x
Return on Equity 10.6% 11.6% 14.9%
Earnings Growth Rate 14.0% 5.7% 8.5%
Dividend Yield 2.4% 2.3% 1.7%
Foreign Holdings 11.4% 0.0% 0.0%
Turnover Rate 47%
Ticker Symbol VCVLX
Expense Ratio1 0.27%
30-Day SEC Yield 2.23%
Short-Term Reserves 0.7%

 

Sector Diversification (% of equity exposure)
  Fund
Consumer Discretionary 6.3%
Consumer Staples 7.5
Energy 12.4
Financials 19.4
Health Care 10.4
Industrials 9.4
Information Technology 11.2
Materials 7.2
Real Estate 7.8
Telecommunication Services 3.0
Utilities 5.4

 

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.

Volatility Measures    
  Russell DJ
  3000 U.S. Total
  Value Market
  Index FA Index
R-Squared 0.90 0.81
Beta 1.21 1.17

 

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

Ten Largest Holdings (% of total net assets)
MetLife Inc. Life & Health  
  Insurance 3.2%
Citigroup Inc. Diversified Banks 3.2
Verizon Communications Integrated  
Inc. Telecommunication  
  Services 3.0
Wells Fargo & Co. Diversified Banks 2.6
Comcast Corp. Cable & Satellite 2.4
PNC Financial Services    
Group Inc. Regional Banks 2.1
Chevron Corp. Integrated Oil & Gas 2.0
Celanese Corp. Specialty Chemicals 1.9
Canadian Natural Oil & Gas Exploration  
Resources Ltd. & Production 1.8
Host Hotels & Resorts    
Inc. Hotel & Resort REITs 1.8
Top Ten   24.0%

 

The holdings listed exclude any temporary cash investments and equity index products.

Investment Focus


1 The expense ratio shown is from the prospectus dated January 26, 2018, and represents estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the expense ratio was 0.29%.

8


 

Capital Value 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, 2008, Through September 30, 2018
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended September 30, 2018  
        Final Value
  One Five Ten of a $10,000
  Year Years Years Investment
Capital Value Fund* 8.48% 6.34% 12.17% $31,546
Russell 3000 Value Index 9.46 10.65 9.76 25,383
Multi-Cap Value Funds Average 9.60 9.54 9.49 24,763
Dow Jones U.S. Total Stock Market        
Float Adjusted Index 17.58 13.42 12.05 31,191

 

Multi-Cap Value Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

See Financial Highlights for dividend and capital gains information.

9


 

Capital Value Fund

Fiscal-Year Total Returns (%): September 30, 2008, Through September 30, 2018


10


 

Capital Value Fund

Financial Statements

Statement of Net Assets
As of September 30, 2018

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Market
      Value
    Shares ($000)
Common Stocks (99.5%)    
Consumer Discretionary (6.2%)  
  Comcast Corp. Class A 581,506 20,591
  Newell Brands Inc. 531,523 10,790
* Skechers U. S. A. Inc.    
  Class A 297,400 8,307
  General Motors Co. 239,329 8,058
  Expedia Group Inc. 51,335 6,698
      54,444
Consumer Staples (7.5%)    
  Walgreens Boots    
  Alliance Inc. 195,511 14,253
  British American    
  Tobacco plc 264,747 12,343
  Philip Morris    
  International Inc. 141,729 11,556
  Hormel Foods Corp. 188,600 7,431
  Kroger Co. 242,559 7,061
  Coty Inc. Class A 523,201 6,571
  Archer-Daniels-Midland    
  Co. 118,400 5,952
      65,167
Energy (12.3%)    
  Chevron Corp. 142,181 17,386
  Canadian Natural    
  Resources Ltd. 493,983 16,133
  Cimarex Energy Co. 120,664 11,214
  Halliburton Co. 270,022 10,944
  Anadarko Petroleum    
  Corp. 144,543 9,744
* Concho Resources Inc. 59,500 9,089
  Marathon Oil Corp. 358,643 8,349
  Tenaris SA ADR 223,500 7,492
  Diamondback Energy Inc. 53,731 7,264
  Pioneer Natural    
  Resources Co. 30,341 5,285
* Laredo Petroleum Inc. 575,300 4,700
      107,600

 

Financials (19.2%)    
  MetLife Inc. 604,873 28,260
  Citigroup Inc. 384,996 27,620
  Wells Fargo & Co. 435,316 22,880
  PNC Financial Services    
  Group Inc. 137,281 18,696
  American International    
  Group Inc. 285,302 15,189
  RenaissanceRe    
  Holdings Ltd. 105,968 14,155
* Bank OZK 283,865 10,776
  Unum Group 250,585 9,790
  CNO Financial Group Inc. 377,100 8,002
  Arthur J Gallagher & Co. 95,266 7,092
  Lancashire Holdings Ltd. 675,641 5,352
      167,812
Health Care (10.4%)    
* Mylan NV 386,418 14,143
  Bristol-Myers Squibb Co. 225,097 13,974
  McKesson Corp. 96,363 12,783
  Allergan plc 53,956 10,277
* Biogen Inc. 29,035 10,258
  Koninklijke Philips NV 214,600 9,766
* Seattle Genetics Inc. 88,000 6,787
* Incyte Corp. 88,400 6,107
  AstraZeneca plc ADR 128,100 5,069
* Five Prime Therapeutics    
  Inc. 91,300 1,271
      90,435
Industrials (9.3%)    
  Southwest Airlines Co. 200,200 12,502
  Steelcase Inc. Class A 640,343 11,846
  Herman Miller Inc. 269,015 10,330
  Delta Air Lines Inc. 170,000 9,831
* Genesee & Wyoming    
  Inc. Class A 99,404 9,045
  Sanwa Holdings Corp. 755,500 8,996

 

11


 

Capital Value Fund    
 
 
 
      Market
      Value
    Shares ($000)
  Johnson Controls    
  International plc 234,600 8,211
  Fortune Brands Home    
  & Security Inc. 156,400 8,189
* JELD-WEN Holding Inc. 98,199 2,422
      81,372
Information Technology (11.2%)  
  QUALCOMM Inc. 181,075 13,043
  Western Digital Corp. 205,369 12,022
  KLA-Tencor Corp. 117,997 12,001
  Broadcom Inc. 46,500 11,473
  Genpact Ltd. 350,784 10,738
  Amdocs Ltd. 136,200 8,987
  Samsung Electronics    
  Co. Ltd. 174,624 7,308
* Coherent Inc. 38,100 6,560
  Marvell Technology    
  Group Ltd. 327,300 6,317
*,^ Acacia    
  Communications Inc. 110,371 4,566
  Teradyne Inc. 120,168 4,444
  Silicon Motion    
  Technology Corp. ADR 3,589 193
      97,652
Materials (7.1%)    
  Celanese Corp. Class A 142,245 16,216
  Reliance Steel &    
  Aluminum Co. 184,286 15,718
^ Nutrien Ltd. 137,400 7,934
  CRH plc 229,083 7,497
* Alcoa Corp. 155,900 6,298
  Cabot Corp. 73,700 4,622
  Randgold Resources    
  Ltd. ADR 56,100 3,958
      62,243
Other (0.2%)    
*,§,1 Allstar Co-Invest LLC    
  Private Placement NA 1,169
 
Real Estate (7.7%)    
  Host Hotels & Resorts    
  Inc. 762,591 16,091
  STORE Capital Corp. 334,163 9,286
  Columbia Property    
  Trust Inc. 380,883 9,004
  Brixmor Property Group    
  Inc. 494,116 8,652
  Simon Property Group    
  Inc. 45,238 7,996
  American Tower Corp. 46,259 6,722
  Acadia Realty Trust 187,700 5,261
  Taubman Centers Inc. 75,500 4,517
      67,529

 

Telecommunication Services (3.0%)  
Verizon    
Communications Inc. 489,200 26,118
 
Utilities (5.4%)    
Exelon Corp. 282,211 12,321
Edison International 150,559 10,190
OGE Energy Corp. 253,065 9,191
Sempra Energy 68,085 7,745
* Iberdrola SA 1,026,659 7,541
    46,988
Total Common Stocks    
(Cost $780,951)   868,529
Temporary Cash Investments (1.8%)  
Money Market Fund (1.1%)    
2,3 Vanguard Market Liquidity  
Fund, 2.209% 94,957 9,496
 
  Face  
  Amount  
  ($000)  
Repurchase Agreement (0.7%)  
RBS Securities, Inc.    
2.240%, 10/1/18    
(Dated 9/28/18,    
Repurchase Value    
$6,401,000, collateralized  
by U. S. Treasury    
Note/Bond 1.625%,    
5/15/26, with a value of    
$6,528,000) 6,400 6,400
Total Temporary Cash Investments  
(Cost $15,896)   15,896
Total Investments (101.3%)    
(Cost $796,847)   884,425

 

12


 

Capital Value Fund  
 
 
 
 
  Amount
  ($000)
Other Assets and Liabilities (-1.3%)  
Other Assets  
Investment in Vanguard 45
Receivables for Investment Securities Sold 1,281
Receivables for Accrued Income 1,529
Receivables for Capital Shares Issued 212
Unrealized Appreciation—  
Forward Currency Contracts 150
Other Assets 184
Total Other Assets 3,401
Liabilities  
Payables for Investment Securities  
Purchased (2,377)
Collateral for Securities on Loan (9,495)
Payables to Investment Advisor (142)
Payables for Capital Shares Redeemed (703)
Payables to Vanguard (1,602)
Unrealized Depreciation—  
Forward Currency Contracts (13)
Total Liabilities (14,332)
Net Assets (100%)  
Applicable to 63,336,437 outstanding  
$.001 par value shares of beneficial  
interest (unlimited authorization) 873,494
Net Asset Value Per Share $13.79

 

At September 30, 2018, net assets consisted of:
  Amount
  ($000)
Paid-in Capital 789,611
Undistributed Net Investment Income 11,929
Accumulated Net Realized Losses (15,756)
Unrealized Appreciation (Depreciation)  
Investment Securities 87,578
Forward Currency Contracts 137
Foreign Currencies (5)
Net Assets 873,494

 

See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers.
The total value of securities on loan is $9,007,000.
§ Security value determined using significant unobservable
inputs.
1 Restricted security represents 0.2% of net assets. Shares not
applicable for this private placement. See Restricted Security
table for additional information.
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 Includes $9,495,000 of collateral received for securities on loan.
ADR—American Depositary Receipt.

13


 

Capital Value Fund

Restricted Securities as of Period End    
 
    Acquisition
  Acquisition Cost
Security Name Date ($000)
Allstar Co-Invest LLC Private Placement August 2011 1,677

 

Derivative Financial Instruments Outstanding as of Period End      
 
Forward Currency Contracts            
            Unrealized
  Contract         Appreciation
      Contract Amount (000)  
  Settlement         (Depreciation)
Counterparty Date   Receive   Deliver ($000)
J.P. Morgan Securities LLC 12/19/18 USD 7,250 JPY 801,276 150
J.P. Morgan Securities LLC 12/19/18 USD 5,071 EUR 4,348 (13)
            137
EUR—Euro.            
JPY—Japanese yen.            
USD—U.S. dollar.            

 

See accompanying Notes, which are an integral part of the Financial Statements.

14


 

Capital Value Fund

Statement of Operations

  Year Ended
  September 30, 2018
  ($000)
Investment Income  
Income  
Dividends1 20,095
Interest 2 113
Securities Lending—Net 488
Total Income 20,696
Expenses  
Investment Advisory Fees—Note B  
Basic Fee 1,996
Performance Adjustment (1,479)
The Vanguard Group—Note C  
Management and Administrative 1,840
Marketing and Distribution 112
Custodian Fees 29
Auditing Fees 34
Shareholders’ Reports and Proxy 21
Trustees’ Fees and Expenses 2
Total Expenses 2,555
Net Investment Income 18,141
Realized Net Gain (Loss)  
Investment Securities Sold 2 81,410
Forward Currency Contracts 592
Foreign Currencies (67)
Realized Net Gain (Loss) 81,935
Change in Unrealized Appreciation (Depreciation)  
Investment Securities 2 (26,951)
Forward Currency Contracts (115)
Foreign Currencies 5
Change in Unrealized Appreciation (Depreciation) (27,061)
Net Increase (Decrease) in Net Assets Resulting from Operations 73,015

 

1 Dividends are net of foreign withholding taxes of $167,000.

2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, ($1,000), and ($1,000), respectively.

See accompanying Notes, which are an integral part of the Financial Statements.

15


 

Capital Value Fund

Statement of Changes in Net Assets

  Year Ended September 30,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 18,141 18,261
Realized Net Gain (Loss) 81,935 69,458
Change in Unrealized Appreciation (Depreciation) (27,061) 38,881
Net Increase (Decrease) in Net Assets Resulting from Operations 73,015 126,600
Distributions    
Net Investment Income (17,678) (15,817)
Realized Capital Gain
Total Distributions (17,678) (15,817)
Capital Share Transactions    
Issued 57,634 80,436
Issued in Lieu of Cash Distributions 16,300 14,657
Redeemed (159,126) (235,684)
Net Increase (Decrease) from Capital Share Transactions (85,192) (140,591)
Total Increase (Decrease) (29,855) (29,808)
Net Assets    
Beginning of Period 903,349 933,157
End of Period1 873,494 903,349

 

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $11,929,000 and $11,533,000.

See accompanying Notes, which are an integral part of the Financial Statements.

16


 

Capital Value Fund

Financial Highlights

For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $12.96 $11.50 $11.45 $15.32 $14.57
Investment Operations          
Net Investment Income . 2731 .2411 .180 .1291 .1782
Net Realized and Unrealized Gain (Loss)          
on Investments .817 1.420 1.060 (2.330) 2.055
Total from Investment Operations 1.090 1.661 1.240 (2.201) 2.233
Distributions          
Dividends from Net Investment Income (. 260) (. 201) (.144) (.175) (.111)
Distributions from Realized Capital Gains (1.046) (1.494) (1.372)
Total Distributions (.260) (.201) (1.190) (1.669) (1.483)
Net Asset Value, End of Period $13.79 $12.96 $11.50 $11.45 $15.32
 
Total Return3 8.48% 14.56% 11.36% -15.67% 16.50%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $873 $903 $933 $1,059 $1,784
Ratio of Total Expenses to Average Net Assets4 0.29% 0.27% 0.25% 0.50% 0.47%
Ratio of Net Investment Income to          
Average Net Assets 2.04% 1.97% 1.51% 0.93% 1.19%2
Portfolio Turnover Rate 47% 41% 134% 90% 90%

 

1 Calculated based on average shares outstanding.
2 Net investment income per share and the ratio of net investment income to average net assets include $0.18 and 0.12%,
respectively, resulting from a special dividend from Vodafone Group plc in the form of cash and shares in Verizon Communications
Inc. in February 2014.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of (0.17%), (0.19%), (0.20%), 0.06%, and 0.02%.

See accompanying Notes, which are an integral part of the Financial Statements.

17


 

Capital Value Fund

Notes to Financial Statements

Vanguard Capital Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

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. Forward Currency Contracts: The fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets

18


 

Capital Value Fund

decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets 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 forward currency contract gains (losses).

During the year ended September 30, 2018, the fund’s average investment in forward currency contracts represented 2% of net assets, based on the average of notional amounts at each quarter-end during the period.

4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counter-parties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counter-party’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.

5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2015–2018), and has concluded that no provision for federal 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 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

19


 

Capital Value Fund

agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets for the return of the collateral, during the period the securities are on loan. 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 Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees 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 this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at September 30, 2018, or at any time during the period then ended.

9. Other: Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

B. Wellington Management Company LLP provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the Dow Jones U.S. Total Stock Market Float Adjusted Index for the preceding three years. For the year ended September 30, 2018, the investment advisory fee represented an effective annual basic rate of 0.23% of the fund’s average net assets before a decrease of $1,479,000 (0.17%) based on performance.

C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.

20


 

Capital Value Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At September 30, 2018, the fund had contributed to Vanguard capital in the amount of $45,000, representing 0.01% of the fund’s net assets and 0.02% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1Quoted prices in active markets for identical securities.

Level 2Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.

The following table summarizes the market value of the fund’s investments as of September 30, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
Common Stocks 818,323 49,037 1,169
Temporary Cash Investments 9,496 6,400
Forward Currency Contracts—Assets 150
Forward Currency Contracts—Liabilities (13)
Total 827,819 55,574 1,169

 

E. 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, the following permanent differences primarily attributable to the accounting for foreign currency transactions were reclassified to the following accounts:

  Amount
  ($000)
Paid-in Capital
Undistributed (Overdistributed) Net Investment Income (67)
Accumulated Net Realized Gains (Losses) 67

 

21


 

Capital Value Fund

Temporary differences between book-basis and tax-basis components of accumulated net earnings (losses) 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 tax deferral of losses on wash sales and forward currency contracts. As of period end, the tax-basis components of accumulated net earnings (losses) are detailed in the table as follows:

  Amount
  ($000)
Undistributed Ordinary Income 13,648
Undistributed Long-term Gains
Capital Loss Carryforwards (Non-expiring)* (15,830)
Net Unrealized Gains (Losses) 87,573

 

* The fund used capital loss carryforwards of $81,887,000 to offset taxable capital gains realized during the year ended
September 30, 2018, reducing the amount of capital gains that would otherwise be available to distribute to shareholders.

As of September 30, 2018, 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 796,847
Gross Unrealized Appreciation 123,037
Gross Unrealized Depreciation (35,459)
Net Unrealized Appreciation (Depreciation) 87,578

 

F. During the year ended September 30, 2018, the fund purchased $416,951,000 of investment securities and sold $499,441,000 of investment securities, other than temporary cash investments.

G. Capital shares issued and redeemed were:    
  Year Ended September 30,
  2018 2017
  Shares Shares
  (000) (000)
Issued 4,316 6,622
Issued in Lieu of Cash Distributions 1,227 1,209
Redeemed (11,915) (19,274)
Net Increase (Decrease) in Shares Outstanding (6,372) (11,443)

 

H. Management has determined that no events or transactions occurred subsequent to September 30, 2018, that would require recognition or disclosure in these financial statements.

22


 

Report of Independent Registered
Public Accounting Firm

To the Board of Trustees of Vanguard Malvern Funds and Shareholders of Vanguard Capital Value Fund

Opinion on the Financial Statements

We have audited the accompanying statement of net assets of Vanguard Capital Value Fund (one of the funds constituting Vanguard Malvern Funds, referred to hereafter as the “Fund”) as of September 30, 2018, the related statement of operations for the year ended September 30, 2018, the statement of changes in net assets for each of the two years in the period ended September 30, 2018, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2018 (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, 2018, 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, 2018 and the financial highlights for each of the five years in the period ended September 30, 2018 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, 2018 by correspondence with the custodians and brokers and by agreement to the underlying ownership records of the transfer agent; 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 15, 2018

We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.

23


 

Special 2018 tax information (unaudited) for Vanguard Capital Value Fund

This information for the fiscal year ended September 30, 2018, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $17,678,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 85.3% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

24


 

Your Fund’s After-Tax Returns

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2018. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

Average Annual Total Returns: Capital Value Fund      
Periods Ended September 30, 2018      
  One Five Ten
  Year Years Years
Returns Before Taxes 8.48% 6.34% 12.17%
Returns After Taxes on Distributions 7.99 3.94 10.78
Returns After Taxes on Distributions and Sale of Fund Shares 5.35 4.06 9.65

 

25


 

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.

26


 

Six Months Ended September 30, 2018      
  Beginning Ending Expenses
  Account Value Account Value Paid During
Capital Value Fund 3/31/2018 9/30/2018 Period
Based on Actual Fund Return $1,000.00 $1,064.04 $1.50
Based on Hypothetical 5% Yearly Return 1,000.00 1,023.61 1.47

 

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 0.29%. 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).

27


 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.

Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.

Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share.

For a fund, the weighted average price/book ratio of the stocks it holds.

28


 

Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

29


 

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

30


 

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 on an at-cost basis.

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 211 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 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. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

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. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.

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), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) 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 Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

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 LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.

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. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

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). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).


 

Executive Officers

Glenn Booraem

Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

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. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Joseph Brennan Chris D. McIsaac
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings

 

Chairman Emeritus and Senior Advisor

John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder

John C. Bogle
Chairman and Chief Executive Officer, 1974–1996


 

  P.O. Box 2600
  Valley Forge, PA 19482-2600
 
 
 
Connect with Vanguard® > vanguard.com
 
 
 
Fund Information > 800-662-7447 Source for Bloomberg Barclays indexes: Bloomberg
Direct Investor Account Services > 800-662-2739 Index Services Limited. Copyright 2018, Bloomberg. All
  rights reserved.
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  CFA® is a registered trademark owned by CFA Institute.
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Who Are Deaf or Hard of Hearing > 800-749-7273  
 
This material may be used in conjunction  
with the offering of shares of any Vanguard  
fund only if preceded or accompanied by  
the fund’s current prospectus.  
 
All comparative mutual fund data are from Lipper, a  
Thomson Reuters Company, or 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, 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 sec.gov.  
 
You can review and copy information about your fund at  
the SEC’s Public Reference Room in Washington, D.C. To  
find out more about this public service, call the SEC at  
202-551-8090. Information about your fund is also  
available on the SEC’s website, and you can receive  
copies of this information, for a fee, by sending a  
request in either of two ways: via email addressed to  
publicinfo@sec.gov or via regular mail addressed to the  
Public Reference Section, Securities and Exchange  
Commission, Washington, DC 20549-1520.  
  © 2018 The Vanguard Group, Inc.
  All rights reserved.
  Vanguard Marketing Corporation, Distributor.
 
  Q3280 112018

 


Annual Report | September 30, 2018

Vanguard Short-Term Inflation-Protected

Securities Index Fund


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 3
Fund Profile. 5
Performance Summary. 6
Financial Statements. 9
About Your Fund’s Expenses. 25
Glossary. 27

 

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.

See the Glossary for definitions of investment terms used in this report.


 

Your Fund’s Performance at a Glance

• For the 12 months ended September 30, 2018, Vanguard Short-Term Inflation-Protected Securities Index Fund returned 0.91% for Investor Shares, tracking its benchmark (+1.01%) and ahead of the average return of its peer funds (+0.33%). The 30-day SEC yield for Investor Shares began the period at –0.20% and ended at 0.79%.

• Prices of regular U.S. Treasury securities fell during the period as economic prospects brightened and interest rates rose. Treasury inflation-protected securities (TIPS) outperformed regular Treasuries as inflation expectations increased, a development that typically favors TIPS over nominal Treasuries.

• A measure of expected inflation over the next five years (the gap between nominal and TIPS yields) widened from 1.82% to 2.04%.

• Since inception, the fund’s average annual return has been in line with that of its benchmark and has exceeded that of its peers.

Total Returns: Fiscal Year Ended September 30, 2018      
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Short-Term Inflation-Protected Securities Index Fund      
Investor Shares 0.79% 3.09% -2.18% 0.91%
ETF Shares 0.85      
Market Price       0.97
Net Asset Value       1.01
Admiral™ Shares 0.85 3.18 -2.18 1.00
Institutional Shares 0.87 3.20 -2.18 1.02
Bloomberg Barclays U.S. Treasury Inflation-Protected        
Securities (TIPS) 0–5 Year Index       1.01
Inflation-Protected Bond Funds Average       0.33

 

Inflation-Protected Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the Nasdaq exchange and are available only through brokers. The table provides ETF returns based on both the Nasdaq market price and the net asset value for a share. U.S. Pat. Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.

For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV.

1


 

Total Returns: Inception Through September 30, 2018  
  Average
  Annual Return
Short-Term Inflation-Protected Securities Index Fund Investor Shares (Returns since inception:  
10/16/2012) 0.23%
Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0–5 Year Index 0.32
Inflation-Protected Bond Funds Average -0.40
Inflation-Protected Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.  

 

The figures shown represent past performance, which is not a guarantee of future results. (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.

Expense Ratios          
Your Fund Compared With Its Peer Group          
  Investor ETF Admiral  Institutional Peer Group
  Shares Shares Shares Shares Average
Short-Term Inflation-Protected Securities Index          
Fund 0.15% 0.06% 0.06% 0.04% 0.71%

 

The fund expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the expense ratios were 0.14% for Investor Shares, 0.06% for ETF Shares, 0.06% for Admiral Shares, and 0.04% for Institutional Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.

Peer group: Inflation-Protected Bond Funds.

2


 

CEO’s Perspective


Tim Buckley
President and Chief Executive Officer

Dear Shareholder,

Over the years, I’ve found that prudent investors exhibit a common trait: discipline. No matter how the markets move or what new investing fad hits the headlines, those who stay focused on their goals and tune out the noise are set up for long-term success.

The prime gateway to investing is saving, and you don’t usually become a saver without a healthy dose of discipline. Savers make the decision to sock away part of their income, which means spending less and delaying gratification, no matter how difficult that may be.

Of course, disciplined investing extends beyond diligent saving. The financial markets, in the short term especially, are unpredictable; I have yet to meet the investor who can time them perfectly. It takes discipline to resist the urge to go all-in when markets are frothy or to retreat when things look bleak.

Staying put with your investments is one strategy for handling volatility. Another, rebalancing, requires even more discipline because it means steering your money away from strong performers and toward poorer performers.

Patience—a form of discipline—is also the friend of long-term investors. Higher returns are the potential reward for weathering the market’s turbulence and uncertainty.

3


 

We have been enjoying one of the longest bull markets in history, but it won’t continue forever. Prepare yourself now for how you will react when volatility comes back. Don’t panic. Don’t chase returns or look for answers outside the asset classes you trust. And be sure to rebalance periodically, even when there’s turmoil.

Whether you’re a master of self-control, get a boost from technology, or work with a professional advisor, know that discipline

is necessary to get the most out of your investment portfolio. And know that Vanguard is with you for the entire ride.

Thank you for your continued loyalty.


Mortimer J. Buckley
President and Chief Executive Officer
October 18, 2018

Market Barometer      
    Average Annual Total Returns
  Periods Ended September 30, 2018
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) 17.76% 17.07% 13.67%
Russell 2000 Index (Small-caps) 15.24 17.12 11.07
Russell 3000 Index (Broad U.S. market) 17.58 17.07 13.46
FTSE All-World ex US Index (International) 2.13 10.18 4.51
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.22% 1.31% 2.16%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 0.35 2.24 3.54
FTSE Three-Month U. S. Treasury Bill Index 1.57 0.80 0.48
 
CPI      
Consumer Price Index 2.28% 1.99% 1.52%

 

4


 

Short-Term Inflation-Protected Securities Index Fund

Fund Profile
As of September 30, 2018

Share-Class Characteristics        
  Investor   Admiral Institutional
  Shares ETF Shares Shares Shares
Ticker Symbol VTIPX VTIP VTAPX VTSPX
Expense Ratio1 0.15% 0.06% 0.06% 0.04%
30-Day SEC Yield2 0.79% 0.85% 0.85% 0.87%

 

Financial Attributes    
 
    Bloomberg  
    Barclays Bloomberg
    U.S. TIPS Barclays
    0–5 Year Aggregate
  Fund Index Bond Index
 
Number of Bonds 15 15 10,112
 
Yield to Maturity      
(before expenses) 2.7% 2.7% 3.5%
 
Average Coupon 0.5% 0.5% 3.2%
 
Average Duration 2.7 years 2.7 years 6.0 years
 
Average Effective      
Maturity 2.7 years 2.7 years 8.4 years
 
Short-Term      
Reserves 0.1%

 

Sector Diversification (% of portfolio)  
Treasury/Agency 100.0%

 

Volatility Measures    
  Bloomberg Bloomberg
  Barclays U.S. Barclays
  TIPS 0–5 Aggregate
  Year Index Bond Index
R-Squared 0.99 0.45
Beta 1.03 0.32

 

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

Distribution by Credit Quality (% of portfolio)
U.S. Government 100.0%

 

Credit-quality ratings are obtained from Barclays and are from Moody's, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. For more information about these ratings, see the Glossary entry for Credit Quality.

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 15.3%
1 - 3 Years 40.7
3 - 5 Years 44.0

 

Investment Focus

1 The expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the expense ratios were 0.14% for Investor Shares, 0.06% for ETF Shares, 0.06% for Admiral Shares, and 0.04% for Institutional Shares.

2 Yields of inflation-protected securities tend to be lower than those of nominal bonds, because the former do not incorporate market expectations about inflation. The principal amounts—and thus the interest payments—of inflation-protected securities are adjusted over time to reflect inflation.

 

5


 

Short-Term Inflation-Protected Securities Index 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: October 16, 2012, Through September 30, 2018
Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended September 30, 2018  
 
      Since Final Value
  One Five Inception of a $10,000
  Year Years (10/16/2012) Investment
Short-Term Inflation-Protected        
Securities Index Fund Investor Shares 0.91% 0.45% 0.23% $10,136
Bloomberg Barclays U.S. Treasury        
         
Inflation-Protected Securities (TIPS) 0–5        
Year Index 1.01 0.63 0.32 10,192
 
Inflation-Protected Bond Funds Average 0.33 0.80 -0.40 9,766
Bloomberg Barclays U.S. Aggregate        
Bond Index -1.22 2.16 1.52 10,939

 

Inflation-Protected Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

      Since Final Value
  One Five Inception of a $10,000
  Year Years (10/12/2012) Investment
Short-Term Inflation-Protected Securities        
Index Fund ETF Shares Net Asset Value 1.01% 0.55% 0.32% $10,190
Bloomberg Barclays U.S. Treasury        
Inflation-Protected Securities (TIPS) 0–5 Year        
Index 1.01 0.63 0.32 10,191
Bloomberg Barclays U.S. Aggregate Bond        
Index -1.22 2.16 1.49 10,924

 

"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

See Financial Highlights for dividend and capital gains information.

6


 

Short-Term Inflation-Protected Securities Index Fund

    Average Annual Total Returns  
  Periods Ended September 30, 2018  
      Since Final Value
  One Five Inception of a $10,000
  Year Years (10/16/2012) Investment
Short-Term Inflation-Protected Securities        
Index Fund Admiral Shares 1.00% 0.54% 0.32% $10,190
Bloomberg Barclays U.S. Treasury        
Inflation-Protected Securities (TIPS) 0–5 Year        
Index 1.01 0.63 0.32 10,192
Bloomberg Barclays U.S. Aggregate Bond        
Index -1.22 2.16 1.52 10,939

 

"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

      Since Final Value
  One Five Inception of a $5,000,000
  Year Years (10/17/2012) Investment
Short-Term Inflation-Protected Securities        
Index Fund Institutional Shares 1.02% 0.58% 0.35% $5,106,110
Bloomberg Barclays U.S. Treasury        
Inflation-Protected Securities (TIPS) 0–5 Year        
Index 1.01 0.63 0.33 5,099,649
Bloomberg Barclays U.S. Aggregate Bond        
Index -1.22 2.16 1.56 5,482,127

 

"Since Inception" performance is calculated from the Institutional Shares’ inception date for both the fund and its comparative standards.

Cumulative Returns of ETF Shares: October 12, 2012, Through September 30, 2018  
 
      Since
  One Five Inception
  Year Years (10/12/2012)
Short-Term Inflation-Protected Securities Index Fund      
ETF Shares Market Price 0.97% 2.68% 1.95%
Short-Term Inflation-Protected Securities Index Fund      
ETF Shares Net Asset Value 1.01 2.77 1.90
Bloomberg Barclays U.S. Treasury      
Inflation-Protected Securities (TIPS) 0–5 Year Index 1.01 3.17 1.91

 

"Since Inception" performance is calculated from the ETF Shares’ inception date for both the fund and its comparative standards.

7


 

Short-Term Inflation-Protected Securities Index Fund

Fiscal-Year Total Returns (%): October 16, 2012, Through September 30, 2018  
        Bloomberg
        Barclays
        U.S. TIPS
        0–5 Year
      Investor Shares Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2013 0.09% -1.00% -0.91% -1.20%
2014 0.02 -0.04 -0.02 0.21
2015 0.70 -2.06 -1.36 -1.19
2016 0.43 2.05 2.48 2.62
2017 0.55 -0.24 0.31 0.51
2018 3.09 -2.18 0.91 1.01

 

8


 

Short-Term Inflation-Protected Securities Index Fund

Financial Statements

Statement of Net Assets
As of September 30, 2018

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

      Face Market
    Maturity Amount Value
  Coupon Date ($000) ($000)
U. S. Government and Agency Obligations (99.8%)      
U. S. Government Securities (99.8%)        
United States Treasury Inflation Indexed Bonds 2.125% 1/15/19 611,359 719,383
United States Treasury Inflation Indexed Bonds 0.125% 4/15/19 2,368,971 2,532,265
United States Treasury Inflation Indexed Bonds 1.875% 7/15/19 691,566 826,300
United States Treasury Inflation Indexed Bonds 1.375% 1/15/20 854,400 1,002,692
United States Treasury Inflation Indexed Bonds 0.125% 4/15/20 2,373,265 2,521,202
United States Treasury Inflation Indexed Bonds 1.250% 7/15/20 1,316,264 1,538,578
United States Treasury Inflation Indexed Bonds 1.125% 1/15/21 1,524,576 1,766,478
United States Treasury Inflation Indexed Bonds 0.125% 4/15/21 2,086,324 2,173,312
United States Treasury Inflation Indexed Bonds 0.625% 7/15/21 1,661,078 1,852,344
United States Treasury Inflation Indexed Bonds 0.125% 1/15/22 1,840,130 1,997,945
United States Treasury Inflation Indexed Bonds 0.125% 4/15/22 2,082,192 2,096,612
United States Treasury Inflation Indexed Bonds 0.125% 7/15/22 1,928,722 2,062,399
United States Treasury Inflation Indexed Bonds 0.125% 1/15/23 1,944,537 2,055,325
United States Treasury Inflation Indexed Bonds 0.625% 4/15/23 1,471,333 1,473,843
United States Treasury Inflation Indexed Bonds 0.375% 7/15/23 1,942,808 2,062,740
Total U.S. Government and Agency Obligations (Cost $27,125,074)   26,681,418
 
      Shares  
Temporary Cash Investment (0.1%)        
Money Market Fund (0.1%)        
1 Vanguard Market Liquidity Fund (Cost $16,415) 2.209%   164,149 16,415
Total Investments (99.9%) (Cost $27,141,489)       26,697,833

 

9


 

Short-Term Inflation-Protected Securities Index Fund

  Amount
  ($000)
Other Assets and Liabilities (0.1%)  
Other Assets  
Investment in Vanguard 1,342
Receivables for Accrued Income 33,204
Receivables for Capital Shares Issued 157,442
Total Other Assets 191,988
Liabilities  
Payables for Investment Securities Purchased (150,428)
Payables for Capital Shares Redeemed (12,415)
Payables to Vanguard (3,753)
Other Liabilities (24)
Total Liabilities (166,620)
Net Assets (100%) 26,723,201

 

At September 30, 2018, net assets consisted of:  
  Amount
  ($000)
Paid-in Capital 27,246,405
Undistributed Net Investment Income 93,720
Accumulated Net Realized Losses (173,268)
Unrealized Appreciation (Depreciation) (443,656)
Net Assets 26,723,201
 
Investor Shares—Net Assets  
Applicable to 275,641,114 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 6,678,915
Net Asset Value Per Share—Investor Shares $24.23
 
ETF Shares—Net Assets  
Applicable to 112,792,013 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 5,452,562
Net Asset Value Per Share—ETF Shares $48.34
 
Admiral Shares—Net Assets  
Applicable to 269,015,939 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 6,524,944
Net Asset Value Per Share—Admiral Shares $24.25

 

10


 

Short-Term Inflation-Protected Securities Index Fund

  Amount
  ($000)
Institutional Shares—Net Assets  
Applicable to 332,379,281 outstanding $.001 par value shares of  
beneficial interest (unlimited authorization) 8,066,780
Net Asset Value Per Share—Institutional Shares $24.27

 

See Note A in Notes to Financial Statements.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown
is the 7-day yield.

See accompanying Notes, which are an integral part of the Financial Statements.

11


 

Short-Term Inflation-Protected Securities Index Fund

Statement of Operations

  Year Ended
  September 30, 2018
  ($000)
Investment Income  
Income  
Interest1 702,385
Total Income 702,385
Expenses  
The Vanguard Group—Note B  
Investment Advisory Services 764
Management and Administrative—Investor Shares 7,543
Management and Administrative—ETF Shares 2,194
Management and Administrative—Admiral Shares 2,677
Management and Administrative—Institutional Shares 2,514
Marketing and Distribution—Investor Shares 1,011
Marketing and Distribution—ETF Shares 281
Marketing and Distribution—Admiral Shares 456
Marketing and Distribution—Institutional Shares 221
Custodian Fees 130
Auditing Fees 64
Shareholders’ Reports and Proxy—Investor Shares 71
Shareholders’ Reports and Proxy—ETF Shares 222
Shareholders’ Reports and Proxy—Admiral Shares 111
Shareholders’ Reports and Proxy—Institutional Shares 7
Trustees’ Fees and Expenses 15
Total Expenses 18,281
Net Investment Income 684,104
Realized Net Gain (Loss)  
Investment Securities Sold1,2 (41,881)
Futures Contracts 1,884
Realized Net Gain (Loss) (39,997)
Change in Unrealized Appreciation (Depreciation) of Investment Securities1 (398,504)
Net Increase (Decrease) in Net Assets Resulting from Operations 245,603

 

1 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $3,306,000, $186,000, and $1,000, respectively. Purchases and sales are for temporary cash investment purposes.

2 Includes $29,083,000 of net gains resulting from in-kind redemptions; such gains are not taxable to the fund.

See accompanying Notes, which are an integral part of the Financial Statements.

12


 

Short-Term Inflation-Protected Securities Index Fund

Statement of Changes in Net Assets

  Year Ended September 30,
  2018 2017
  ($000) ($000)
Increase (Decrease) in Net Assets    
Operations    
Net Investment Income 684,104 254,685
Realized Net Gain (Loss) (39,997) (7,041)
Change in Unrealized Appreciation (Depreciation) (398,504) (168,286)
Net Increase (Decrease) in Net Assets Resulting from Operations 245,603 79,358
Distributions    
Net Investment Income    
Investor Shares (196,531) (27,992)
ETF Shares (158,959) (21,465)
Admiral Shares (186,081) (26,937)
Institutional Shares (242,955) (44,908)
Realized Capital Gain    
Investor Shares
ETF Shares
Admiral Shares
Institutional Shares
Total Distributions (784,526) (121,302)
Capital Share Transactions    
Investor Shares 912,377 826,514
ETF Shares 1,681,666 1,409,404
Admiral Shares 1,573,157 1,712,740
Institutional Shares 1,245,525 1,503,409
Net Increase (Decrease) from Capital Share Transactions 5,412,725 5,452,067
Total Increase (Decrease) 4,873,802 5,410,123
Net Assets    
Beginning of Period 21,849,399 16,439,276
End of Period1 26,723,201 21,849,399

 

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $93,720,000 and $194,124,000.

See accompanying Notes, which are an integral part of the Financial Statements.

13


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights

Investor Shares          
 
For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $24.77 $24.83 $24.23 $24.74 $24.75
Investment Operations          
Net Investment Income . 6691 .3121 .0801 (.131) .183
Net Realized and Unrealized Gain (Loss)          
on Investments (. 448) (. 237) . 520 (. 206) (.189)
Total from Investment Operations . 221 . 075 . 600 (. 337) (. 006)
Distributions          
Dividends from Net Investment Income (.761) (.135) (.173) (. 004)
Distributions from Realized Capital Gains
Total Distributions (.761) (.135) (.173) (. 004)
Net Asset Value, End of Period $24.23 $24.77 $24.83 $24.23 $24.74
 
Total Return2 0.91% 0.31% 2.48% -1.36% -0.02%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $6,679 $5,904 $5,088 $4,532 $4,517
Ratio of Total Expenses to Average Net Assets 0.14% 0.15% 0.16% 0.17% 0.20%
Ratio of Net Investment Income to          
Average Net Assets 2.73% 1.26% 0.42% (0.53%) 0.88%
Portfolio Turnover Rate 3 25% 27% 28% 26% 18%

 

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

14


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights

ETF Shares          
 
For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $49.41 $49.59 $48.36 $49.38 $49.36
Investment Operations          
Net Investment Income 1.3581 .6711 .2511 (. 210) . 414
Net Realized and Unrealized Gain (Loss)          
on Investments (. 869) (. 477) . 979 (. 415) (. 371)
Total from Investment Operations .489 .194 1.230 (.625) .043
Distributions          
Dividends from Net Investment Income (1.559) (.374) (.395) (.023)
Distributions from Realized Capital Gains
Total Distributions (1.559) (.374) (.395) (.023)
Net Asset Value, End of Period $48.34 $49.41 $49.59 $48.36 $49.38
 
Total Return 1.01% 0.40% 2.54% -1.26% 0.09%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $5,453 $3,881 $2,478 $1,838 $1,336
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.07% 0.08% 0.10%
Ratio of Net Investment Income to          
Average Net Assets 2.81% 1.35% 0.51% (0.44%) 0.98%
Portfolio Turnover Rate2 25% 27% 28% 26% 18%

 

1 Calculated based on average shares outstanding.

2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

15


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights

Admiral Shares          
 
For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $24.79 $24.88 $24.27 $24.77 $24.77
Investment Operations          
Net Investment Income . 6921 .3381 .1491 (.105) . 209
Net Realized and Unrealized Gain (Loss)          
on Investments (. 450) (. 241) . 461 (.197) (.195)
Total from Investment Operations . 242 .097 .610 (. 302) .014
Distributions          
Dividends from Net Investment Income (.782) (.187) (.198) (. 014)
Distributions from Realized Capital Gains
Total Distributions (.782) (.187) (.198) (. 014)
Net Asset Value, End of Period $24.25 $24.79 $24.88 $24.27 $24.77
 
Total Return2 1.00% 0.40% 2.51% -1.22% 0.06%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $6,525 $5,078 $3,373 $2,126 $1,518
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.07% 0.08% 0.10%
Ratio of Net Investment Income to          
Average Net Assets 2.81% 1.35% 0.51% (0.44%) 0.98%
Portfolio Turnover Rate 3 25% 27% 28% 26% 18%

 

1 Calculated based on average shares outstanding.

2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

16


 

Short-Term Inflation-Protected Securities Index Fund

Financial Highlights

Institutional Shares          
 
For a Share Outstanding     Year Ended September 30,
Throughout Each Period 2018 2017 2016 2015 2014
Net Asset Value, Beginning of Period $24.81 $24.90 $24.28 $24.78 $24.77
Investment Operations          
Net Investment Income . 6961 . 3331 .1391 (. 099) . 215
Net Realized and Unrealized Gain (Loss)          
on Investments (. 449) (. 225) . 481 (.196) (.189)
Total from Investment Operations . 247 .108 .620 (. 295) .026
Distributions          
Dividends from Net Investment Income (.787) (.198) (. 205) (. 016)
Distributions from Realized Capital Gains
Total Distributions (.787) (.198) (. 205) (. 016)
Net Asset Value, End of Period $24.27 $24.81 $24.90 $24.28 $24.78
 
Total Return 1.02% 0.44% 2.55% -1.19% 0.11%
 
Ratios/Supplemental Data          
Net Assets, End of Period (Millions) $8,067 $6,986 $5,500 $3,837 $2,706
Ratio of Total Expenses to Average Net Assets 0.04% 0.04% 0.04% 0.05% 0.07%
Ratio of Net Investment Income to          
Average Net Assets 2.83% 1.37% 0.54% (0.41%) 1.01%
Portfolio Turnover Rate2 25% 27% 28% 26% 18%

 

1 Calculated based on average shares outstanding.

2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

17


 

Short-Term Inflation-Protected Securities Index Fund

Notes to Financial Statements

Vanguard Short-Term Inflation-Protected Securities Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, ETF Shares, Admiral Shares, and Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are listed for trading on Nasdaq; they can be purchased and sold through a broker. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.

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. Bonds and 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. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value.

2. Futures Contracts: The fund uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds 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 clearing-house 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 clearing-house 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 assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.

Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets 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 futures gains (losses).

During the year ended September 30, 2018, the fund’s average investments in long and short futures contracts each represented less than 1% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. The fund had no open futures contracts at September 30, 2018.

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2015–2018), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

18


 

Short-Term Inflation-Protected Securities Index Fund

4. Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.

5. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees 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 this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.

The fund had no borrowings outstanding at September 30, 2018, or at any time during the period then ended.

6. Other: Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Inflation adjustments to the face amount of inflation-indexed securities are included in interest income. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses), shareholder reporting, and the proxy. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets. All other costs of operations payable to Vanguard 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, 2018, the fund had contributed to Vanguard capital in the amount of $1,342,000, representing 0.01% of the fund’s net assets and 0.54% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

19


 

Short-Term Inflation-Protected Securities Index Fund

C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

Level 1Quoted prices in active markets for identical securities.

Level 2Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.

The following table summarizes the market value of the fund’s investments as of September 30, 2018, based on the inputs used to value them:

  Level 1 Level 2 Level 3
Investments ($000) ($000) ($000)
U.S. Government and Agency Obligations 26,681,418
Temporary Cash Investments 16,415
Total 16,415 26,681,418

 

D. 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, the following permanent differences primarily attributable to the accounting for in-kind redemptions and inflation adjustments were reclassified to the following accounts:

  Amount
  ($000)
Paid-in Capital 29,067
Undistributed (Overdistributed) Net Investment Income 18
Accumulated Net Realized Gains (Losses) (29,085)

 

Temporary differences between book-basis and tax-basis components of accumulated net earnings (losses) 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 tax deferral of losses on wash sales. As of period end, the tax-basis components of accumulated net earnings (losses) are detailed in the table as follows:

  Amount
  ($000)
Undistributed Ordinary Income 96,606
Undistributed Long-Term Gains
Capital Loss Carryforwards (Non-expiring) (173,251)
Net Unrealized Gains (Losses) (443,656)

 

20


 

Short-Term Inflation-Protected Securities Index Fund

As of September 30, 2018, 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 27,141,489
Gross Unrealized Appreciation
Gross Unrealized Depreciation (443,656)
Net Unrealized Appreciation (Depreciation) (443,656)

 

E. During the year ended September 30, 2018, the fund purchased $10,983,028,000 of investment securities and sold $6,371,883,000 of investment securities, other than temporary cash investments. Purchases and sales include $1,641,452,000 and $336,914,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

F. Capital share transactions for each class of shares were:      
      Year Ended September 30,
    2018   2017
  Amount Shares Amount Shares
  ($000) (000) ($000) (000)
Investor Shares        
Issued 938,053 38,252 1,069,872 43,271
Issued in Lieu of Cash Distributions 196,139 8,067 27,936 1,136
Redeemed (221,815) (9,082) (271,294) (10,974)
Net Increase (Decrease)—Investor Shares 912,377 37,237 826,514 33,433
ETF Shares        
Issued 2,079,941 42,425 1,524,321 30,900
Issued in Lieu of Cash Distributions
Redeemed (398,275) (8,175) (114,917) (2,325)
Net Increase (Decrease)—ETF Shares 1,681,666 34,250 1,409,404 28,575
Admiral Shares        
Issued 2,310,017 94,161 2,400,906 97,067
Issued in Lieu of Cash Distributions 170,230 6,995 25,001 1,016
Redeemed (907,090) (36,988) (713,167) (28,817)
Net Increase (Decrease)—Admiral Shares 1,573,157 64,168 1,712,740 69,266
Institutional Shares        
Issued 1,960,417 79,837 2,636,078 106,487
Issued in Lieu of Cash Distributions 238,639 9,799 44,322 1,801
Redeemed (953,531) (38,884) (1,176,991) (47,524)
Net Increase (Decrease)—Institutional Shares 1,245,525 50,752 1,503,409 60,764

 

21


 

Short-Term Inflation-Protected Securities Index Fund

At September 30, 2018, one shareholder was the record or beneficial owner of 36% of the fund’s net assets. If the shareholder were to redeem its investment in the fund, the redemption might result in an increase in the fund’s expense ratio, cause the fund to incur higher transaction costs, or lead to the realization of taxable capital gains.

G. Management has determined that no events or transactions occurred subsequent to September 30, 2018, that would require recognition or disclosure in these financial statements.

22


 

Report of Independent Registered
Public Accounting Firm

To the Board of Trustees of Vanguard Malvern Funds and Shareholders of Vanguard Short-Term
Inflation-Protected Securities Index Fund

Opinion on the Financial Statements

We have audited the accompanying statement of net assets of Vanguard Short-Term Inflation-Protected Securities Index Fund (one of the funds constituting Vanguard Malvern Funds, referred to hereafter as the “Fund”) as of September 30, 2018, the related statement of operations for the year ended September 30, 2018, the statement of changes in net assets for each of the two years in the period ended September 30, 2018, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2018 (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, 2018, 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, 2018 and the financial highlights for each of the five years in the period ended September 30, 2018 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, 2018 by correspondence with the custodians and brokers and by agreement to the underlying ownership records of the transfer agent; 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 15, 2018

We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.

23


 

Special 2018 tax information (unaudited) for Vanguard Short-Term Inflation-Protected Securities Index Fund

This information for the fiscal year ended September 30, 2018, is included pursuant to provisions of the Internal Revenue Code.

For nonresident alien shareholders, 99.9% of income dividends are interest-related dividends.

24


 

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.

25


 

Six Months Ended September 30, 2018      
  Beginning Ending Expenses
Short-Term Inflation-Protected Securities Index Account Value Account Value Paid During
Fund 3/31/2018 9/30/2018 Period
Based on Actual Fund Return      
Investor Shares $1,000.00 $1,005.57 $0.65
ETF Shares 1,000.00 1,005.92 0.30
Admiral Shares 1,000.00 1,005.76 0.30
Institutional Shares 1,000.00 1,006.31 0.20
Based on Hypothetical 5% Yearly Return      
Investor Shares $1,000.00 $1,024.42 $0.66
ETF Shares 1,000.00 1,024.77 0.30
Admiral Shares 1,000.00 1,024.77 0.30
Institutional Shares 1,000.00 1,024.87 0.20

 

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 0.13% for Investor Shares, 0.06% for ETF Shares, 0.06% for Admiral Shares, and 0.04% for Institutional 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).

26


 

Glossary

30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the fund’s bonds will fluctuate in response to a change in “real” interest rates—meaning rates without inflation expectations built in. Real interest rates are reflected in market yields for inflation-adjusted securities. To see how the fund’s bond values could change, multiply the average duration by the change in real rates. For example, if the average duration were five years, then the value of the fund’s bonds would decline by about 5% if real interest rates rose by 1 percentage point. Conversely, if real rates fell by a percentage point, the value of the bonds would rise about 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” Credit-quality ratings are obtained from Barclays and are from Moody’s, Fitch, and S&P. When ratings from all three agencies are used, the median rating is shown. When ratings from two of the agencies are used, the lower rating for each issue is shown. “Not Rated” is used to classify securities for which a rating is not available.

Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

27


 

Yield to Maturity. This term generally refers to the rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates. For the Short-Term Inflation-Protected Securities Index Fund, the calculation is modified by adding in the inflation adjustment made over the past 12 months. This change results in a figure more directly comparable to the yield-to-maturity figures for other types of bond funds. (An unmodified yield to maturity is used in calculating the fund’s 30-Day SEC Yield.)

28


 

BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Plc, used under license. Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (BISL) (collectively, Bloomberg), or Bloomberg’s licensors, own all proprietary rights in the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (Tips) 0–5 Year Index (Index or Bloomberg Barclays Index).

Neither Barclays Bank Plc, Barclays Capital Inc., or any affiliate (collectively Barclays) or Bloomberg is the issuer or producer of the Short-Term Inflation-Protected Securities Index Fund and neither Bloomberg nor Barclays has any responsibilities, obligations or duties to investors in the Short-Term Inflation-Protected Securities Index Fund. The Index is licensed for use by The Vanguard Group, Inc. (Vanguard) as the sponsor of the Short-Term Inflation-Protected Securities Index Fund. Bloomberg and Barclays’ only relationship with Vanguard in respect of the Index is the licensing of the Index, which is determined, composed and calculated by BISL, or any successor thereto, without regard to the Issuer or the Short-Term Inflation-Protected Securities Index Fund or the owners of the Short-Term Inflation-Protected Securities Index Fund.

Additionally, Vanguard may for itself execute transaction(s) with Barclays in or relating to the Index in connection with the Short-Term Inflation-Protected Securities Index Fund. Investors acquire the Short-Term Inflation-Protected Securities Index Fund from Vanguard and investors neither acquire any interest in the Index nor enter into any relationship of any kind whatsoever with Bloomberg or Barclays upon making an investment in the Short-Term Inflation-Protected Securities Index Fund. The Short-Term Inflation-Protected Securities Index Fund is not sponsored, endorsed, sold or promoted by Bloomberg or Barclays. Neither Bloomberg nor Barclays makes any representation or warranty, express or implied regarding the advisability of investing in the Short-Term Inflation-Protected Securities Index Fund or the advisability of investing in securities generally or the ability of the Index to track corresponding or relative market performance. Neither Bloomberg nor Barclays has passed on the legality or suitability of the Short-Term Inflation-Protected Securities Index Fund with respect to any person or entity. Neither Bloomberg nor Barclays is responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Short-Term Inflation-Protected Securities Index Fund to be issued. Neither Bloomberg nor Barclays has any obligation to take the needs of the Issuer or the owners of the Short-Term Inflation-Protected Securities Index Fund or any other third party into consideration in determining, composing or calculating the Index. Neither Bloomberg nor Barclays has any obligation or liability in connection with administration, marketing or trading of the Short-Term Inflation-Protected Securities Index Fund.

29


 

The licensing agreement between Bloomberg and Barclays is solely for the benefit of Bloomberg and Barclays and not for the benefit of the owners of the Short-Term Inflation-Protected Securities Index Fund, investors or other third parties. In addition, the licensing agreement between Vanguard and Bloomberg is solely for the benefit of Vanguard and Bloomberg and not for the benefit of the owners of the Short-Term Inflation-Protected Securities Index Fund, investors or other third parties.

NEITHER BLOOMBERG NOR BARCLAYS SHALL HAVE ANY LIABILITY TO THE ISSUER, INVESTORS OR TO OTHER THIRD PARTIES FOR THE QUALITY, ACCURACY AND/OR COMPLETENESS OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR FOR INTERRUPTIONS IN THE DELIVERY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, THE INVESTORS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. NEITHER BLOOMBERG NOR BARCLAYS MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EACH HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN. BLOOMBERG RESERVES THE RIGHT TO CHANGE THE METHODS OF CALCULATION OR PUBLICATION, OR

TO CEASE THE CALCULATION OR PUBLICATION OF THE BLOOMBERG BARCLAYS INDEX, AND NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY MISCALCULATION OF OR ANY INCORRECT, DELAYED OR INTERRUPTED PUBLICATION WITH RESPECT TO ANY OF THE BLOOMBERG BARCLAYS INDEX. NEITHER BLOOMBERG NOR BARCLAYS SHALL BE LIABLE FOR ANY DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, INDIRECT

OR CONSEQUENTIAL DAMAGES, OR ANY LOST PROFITS AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH, RESULTING FROM THE USE OF THE BLOOMBERG BARCLAYS INDEX OR ANY DATA INCLUDED THEREIN OR WITH RESPECT TO THE SHORT-TERM INFLATION-PROTECTED SECURITIES INDEX FUND.

None of the information supplied by Bloomberg or Barclays and used in this publication may be reproduced in any manner without the prior written permission of both Bloomberg and Barclays Capital, the investment banking division of Barclays Bank Plc. Barclays Bank Plc is registered in England No. 1026167. Registered office 1 Churchill Place London E14 5HP.

© 2018 Bloomberg. Used with Permission.

Source: Bloomberg Index Services Limited. Copyright 2018, Bloomberg. All rights reserved.

30


 

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 on an at-cost basis.

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 211 Vanguard funds.

Information for each trustee and executive officer of the fund appears below. 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 Trustees1

F. William McNabb III

Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 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. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.

Independent Trustees

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. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.

Amy Gutmann

Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.

1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.


 

JoAnn Heffernan Heisen

Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.

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), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.

Mark Loughridge

Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.

Scott C. Malpass

Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.

Deanna Mulligan

Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) 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 Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.

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 LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.

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. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.

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). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).


 

Executive Officers

Glenn Booraem

Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.

Christine M. Buchanan

Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).

Brian Dvorak

Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.

Thomas J. Higgins

Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.

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. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.

Michael Rollings

Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.

Vanguard Senior Management Team
 
Joseph Brennan Chris D. McIsaac
Mortimer J. Buckley James M. Norris
Gregory Davis Thomas M. Rampulla
John James Karin A. Risi
Martha G. King Anne E. Robinson
John T. Marcante Michael Rollings

 

Chairman Emeritus and Senior Advisor

John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008

Founder

John C. Bogle
Chairman and Chief Executive Officer, 1974–1996


 

 

                                                    
P.O. Box 2600
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All comparative mutual fund data are from Lipper, a
Thomson Reuters Company, or 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, 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 sec.gov.
 
You can review and copy information about your fund at
the SEC’s Public Reference Room in Washington, D.C. To
find out more about this public service, call the SEC at
202-551-8090. Information about your fund is also
available on the SEC’s website, and you can receive
copies of this information, for a fee, by sending a
request in either of two ways: via email addressed to
publicinfo@sec.gov or via regular mail addressed to the
Public Reference Section, Securities and Exchange
Commission, Washington, DC 20549-1520.
© 2018 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
 
Q19670 112018

 


Annual Report | September 30, 2018

Vanguard Core Bond Fund


 

Vanguard’s Principles for Investing Success

We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.

Goals. Create clear, appropriate investment goals.

Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.

Discipline. Maintain perspective and long-term discipline.

A single theme unites these principles: Focus on the things you can control.

We believe there is no wiser course for any investor.

Contents  
Your Fund’s Performance at a Glance. 1
CEO’s Perspective. 2
Advisor’s Report. 4
Fund Profile. 7
Performance Summary. 8
Financial Statements. 10
About Your Fund’s Expenses. 55
Glossary. 57

 

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.

See the Glossary for definitions of investment terms used in this report.


 

Your Fund’s Performance at a Glance

• Vanguard Core Bond Fund returned –1.32% for Investor Shares and –1.19% for Admiral Shares for the 12 months ended September 30, 2018. Those results were roughly in line with the –1.23% return of its benchmark as well as the –1.25% average return for peer funds.

• Bond yields across the maturity spectrum closed higher. Shorter-term yields climbed as the Federal Reserve continued raising rates, and longer-term yields rose on brighter prospects for growth and inflation. The average spread in corporate bond yields fluctuated but finished the period slightly wider.

• An underweight allocation to U.S. Treasuries in favor of investment-grade credit and a modest overweight allocation to BBB-rated bonds helped the fund, as did security selection in financial services, foreign sovereign bonds, and industrials.

• Primary detractors included a slightly longer duration than the benchmark for part of the period and security selection in mortgage-backed securities.

Total Returns: Fiscal Year Ended September 30, 2018      
  30-Day SEC Income Capital Total
  Yield Returns Returns Returns
Vanguard Core Bond Fund        
Investor Shares 3.31% 2.78% -4.10% -1.32%
Admiral™ Shares 3.50 2.91 -4.10 -1.19
Bloomberg Barclays U.S. Aggregate Float Adjusted        
Index       -1.23
Core Bond Funds Average       -1.25

 

Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.

Expense Ratios      
Your Fund Compared With Its Peer Group      
  Investor Admiral Peer Group
  Shares Shares Average
Core Bond Fund 0.25% 0.15% 0.74%

 

The fund expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the fund’s expense ratios were 0.25% for Investor Shares and 0.13% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.

Peer group: Core Bond Funds.

1


 

CEO’s Perspective

 

 

Tim Buckley

President and Chief Executive Officer

Dear Shareholder,

Over the years, I’ve found that prudent investors exhibit a common trait: discipline. No matter how the markets move or what new investing fad hits the headlines, those who stay focused on their goals and tune out the noise are set up for long-term success.

The prime gateway to investing is saving, and you don’t usually become a saver without a healthy dose of discipline. Savers make the decision to sock away part of their income, which means spending less and delaying gratification, no matter how difficult that may be.

Of course, disciplined investing extends beyond diligent saving. The financial markets, in the short term especially, are unpredictable; I have yet to meet the investor who can time them perfectly. It takes discipline to resist the urge to go all-in when markets are frothy or to retreat when things look bleak.

Staying put with your investments is one strategy for handling volatility. Another, rebalancing, requires even more discipline because it means steering your money away from strong performers and toward poorer performers.

Patience—a form of discipline—is also the friend of long-term investors. Higher returns are the potential reward for weathering the market’s turbulence and uncertainty.

2


 

We have been enjoying one of the longest bull markets in history, but it won’t continue forever. Prepare yourself now for how you will react when volatility comes back. Don’t panic. Don’t chase returns or look for answers outside the asset classes you trust. And be sure to rebalance periodically, even when there’s turmoil.

Whether you’re a master of self-control, get a boost from technology, or work with a professional advisor, know that discipline

is necessary to get the most out of your investment portfolio. And know that Vanguard is with you for the entire ride.

Thank you for your continued loyalty.


Mortimer J. Buckley
President and Chief Executive Officer
October 18, 2018

Market Barometer      
    Average Annual Total Returns
  Periods Ended September 30, 2018
  One Year Three Years Five Years
Stocks      
Russell 1000 Index (Large-caps) 17.76% 17.07% 13.67%
Russell 2000 Index (Small-caps) 15.24 17.12 11.07
Russell 3000 Index (Broad U.S. market) 17.58 17.07 13.46
FTSE All-World ex US Index (International) 2.13 10.18 4.51
 
Bonds      
Bloomberg Barclays U.S. Aggregate Bond Index      
(Broad taxable market) -1.22% 1.31% 2.16%
Bloomberg Barclays Municipal Bond Index      
(Broad tax-exempt market) 0.35 2.24 3.54
FTSE Three-Month U. S. Treasury Bill Index 1.57 0.80 0.48
 
CPI      
Consumer Price Index 2.28% 1.99% 1.52%

 

3


 

Advisor’s Report

For the 12 months ended September 30, 2018, Vanguard Core Bond Fund returned –1.32% for Investor Shares and –1.19% for Admiral Shares. The –1.23% return of the benchmark, the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, fell between these results, as did the –1.25% average return for peer funds.

With interest rates climbing, the 30-day SEC yield for Investor Shares rose 113 basis points from a year earlier to 3.31%. The 30-day SEC yield for Admiral Shares climbed 122 basis points to 3.50% over the same time frame. (A basis point is one-hundredth of a percentage point.)

Investment environment

Macroeconomic fundamentals were robust throughout the 12 months. Despite two brief federal government shutdowns early in 2018 and a significant escalation in trade tensions, business confidence persisted and consumer spending remained solid. Unemployment hit an almost 50-year low, finishing the period at 3.7%. Tax-cut legislation enacted in late 2017, the March passage of a bill increasing federal spending, and deregulation all added to optimism about growth. Inflation moved up to hover near the Federal Reserve’s 2% target, with some help from an increase in oil prices.

Yields of U.S. Treasury Securities    
  September 30, September 30,
Maturity 2017 2018
2 years 1.48% 2.82%
5 years 1.94 2.95
10 years 2.33 3.06
30 years 2.86 3.21
Source: Vanguard.    

 

4


 

Acknowledging the economy’s health, the Fed moved further down the path toward monetary policy normalization. It continued shrinking the $4.5 trillion balance sheet it had amassed as part of the monetary stimulus it began after the 2008 global financial crisis. The Fed raised the federal funds target rate in December, March, June, and September, putting it at 2%–2.25% at the close of the fiscal year.

Fed action pushed shorter-term yields higher. The yield of the 2-year Treasury note climbed 134 basis points over the period to 2.82%.

Demand for longer-term Treasury bonds was supported at times by escalating trade tensions, geopolitical flare-ups, and political uncertainties in Europe about Brexit and national elections in Germany and Italy. However, the outlook for continuing growth and rising inflation expectations led yields on these securities to end the period higher. The yield of the bellwether 10-year Treasury note ended the period 73 basis points higher at 3.06%.

Corporate fundamentals remained strong, and corporate earnings were very robust—the tax cuts helped with that—but valuations were high and technical support weakened. With the tax changes for corporations, a number of large multinational companies that had been investing overseas money in high-quality corporate bonds withdrew from the market. The average yield spread of investment-grade corporate bonds over Treasuries started the period very tight,

then widened significantly before narrowing slightly. The average spread stood at 106 basis points at the end of the period, up from 101 basis points a year earlier.

Management of the fund

The fund maintained an underweight allocation to Treasuries, favoring credit sectors. We were overweighted in financials. We believed they could benefit from improved balance sheets, less regulation, and rising interest rates, which tend to lift their profitability. Although concerns about the health of Italian banks weighed on returns from this sector in the United States, our bond selection among banks and insurance companies added value. Selection also was positive in industrials, notably in the energy segment, thanks to an upturn in oil prices.

Our overweight to BBB-rated bonds helped the fund. So did an outsize allocation to asset-backed securities, which are typically high-quality, liquid investments made up of pooled auto loans, credit-card debt, and student loans.

Our relatively small allocation to high-quality sovereign debt outside the United States modestly boosted relative performance. We were more defensive on these securities early in the period but selectively increased our exposure later on as relative value opportunities arose.

The fund’s duration (a measure of its sensitivity to changes in interest rates) was modestly longer than that of its benchmark in late 2017 and early 2018,

5


 

although we brought it back in line by the end of the fiscal year. That positioning detracted from relative performance.

We expected the Fed to keep pushing short-term rates higher, but longer rates rose as well when the market began pricing in a stronger U.S. growth scenario.

Security selection in the mortgage-backed securities (MBS) segment also weighed on performance. We favored collateralized mortgage obligations, but their spreads widening more than those of agency MBS as a whole meant they detracted from performance.

The outlook

In the absence of any external shocks, the U.S. economy is on pace to break above its long-term potential growth rate in 2018, given the tax cuts and increased government spending coming on top of solid fundamentals. That, along with some upward pressure on wages because of the tightening labor market, may push the U.S. Core Personal Consumption Expenditure Price Index a little above 2% by the end of 2018. Against this backdrop, the Fed is likely to keep raising rates and trimming the amount of Treasuries and MBS on its balance sheet through 2019.

We see this bounce as cyclical, however, and still expect long-term structural pressures from an aging population, global sourcing of goods and labor, and technological disruptions to result in moderate long-run growth and inflation.

We may continue to see bouts of volatility related to inflation and interest rate expectations. Other potential triggers include the U.S. midterm elections, an intensification of trade disputes, geopolitical tensions, Brexit uncertainty, government spending in Italy, and missteps by central banks.

It’s worth restating that investors should look beyond short-term volatility and adhere to their long-term investment strategies. And keep in mind the silver lining in higher rates for long-term investors—coupon payments and proceeds from maturing bonds can be reinvested at these rates.

Whatever the markets may bring, our experienced team of portfolio managers, credit analysts, and traders will continue to seek out opportunities to add to the fund’s performance.

Portfolio Managers:

Brian W. Quigley

Gemma Wright-Casparius, Principal

Daniel Shaykevich, Principal

Samuel C. Martinez, CFA

Vanguard Fixed Income Group

October 23, 2018

6


 

Core Bond Fund

Fund Profile

As of September 30, 2018

Share-Class Characteristics  
  Investor Admiral
  Shares Shares
Ticker Symbol VCORX VCOBX
Expense Ratio1 0.25% 0.15%
30-Day SEC Yield 3.31% 3.50%

 

Financial Attributes    
 
    Bloomberg
    Barclays U.S.
    Aggregate
    Float Adjusted
  Fund Index
 
Number of Bonds 738 10,112
 
Yield to Maturity    
(before expenses) 3.9% 3.5%
 
Average Coupon 3.2% 3.1%
 
Average Duration 6.1 years 6.1 years
 
Average Effective    
Maturity 7.4 years 8.5 years
 
Short-Term    
Reserves 6.4%

 

Sector Diversification (% of portfolio)  
Asset-Backed 9.8%
Commercial Mortgage-Backed 4.1
Finance 11.9
Foreign 6.1
Government Mortgage-Backed 25.1
Industrial 15.5
Treasury/Agency 26.3
Utilities 1.1
Other 0.1

 

The agency and mortgage-backed securities sectors may include issues from government-sponsored enterprises; such issues are generally not backed by the full faith and credit of the U.S. government.

Distribution by Effective Maturity  
(% of portfolio)  
Under 1 Year 6.9%
1 - 3 Years 17.3
3 - 5 Years 16.4
5 - 7 Years 20.4
7 - 10 Years 26.0
10 - 20 Years 5.8
20 - 30 Years 6.5
Over 30 Years 0.7

 

Distribution by Credit Quality (% of portfolio)
U.S. Government 51.3%
Aaa 8.3
Aa 3.5
A 11.9
Baa 19.8
Ba 2.2
B 0.8
Not Rated 2.2

 

Credit-quality ratings are obtained from Moody's and S&P, and the higher rating for each issue is shown. "Not Rated" is used to classify securities for which a rating is not available. Not rated securities include a fund's investment in Vanguard Market Liquidity Fund or Vanguard Municipal Cash Management Fund, each of which invests in high-quality money market instruments and may serve as a cash management vehicle for the Vanguard funds, trusts, and accounts. For more information about these ratings, see the Glossary entry for Credit Quality.

Investment Focus


1 The expense ratios shown are from the prospectus dated January 26, 2018, and represent estimated costs for the current fiscal year. For the fiscal year ended September 30, 2018, the expense ratios were 0.25% for Investor Shares and 0.13% for Admiral Shares.

7


 

Core Bond 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: March 28, 2016, Through September 30, 2018

Initial Investment of $10,000


  Average Annual Total Returns  
  Periods Ended September 30, 2018  
 
    Since Final Value
  One Inception of a $10,000
  Year (3/28/2016) Investment
 
Core Bond Fund Investor Shares -1.32% 0.89% $10,224
Bloomberg Barclays U.S.      
Aggregate Float Adjusted Index -1.23 0.83 10,209
 
Core Bond Funds Average -1.25 1.07 10,270

 

Core Bond Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.

"Since Inception" performance is calculated from the Investor Shares’ inception date for both the fund and its comparative standards.

    Since Final Value
  One Inception of a $50,000
  Year (3/28/2016) Investment
 
Core Bond Fund Admiral Shares -1.19% 1.01% $51,271
Bloomberg Barclays U.S. Aggregate Float      
Adjusted Index -1.23 0.83 51,044

 

"Since Inception" performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standards.

See Financial Highlights for dividend and capital gains information.

8


 

Core Bond Fund

Fiscal-Year Total Returns (%): March 28, 2016, Through September 30, 2018  
        Bloomberg
        Barclays U.S.
        Aggregate
        Float Adjusted
      Investor Shares Index
Fiscal Year Income Returns Capital Returns Total Returns Total Returns
2016 0.97% 2.60% 3.57% 3.31%
2017 1.96 -1.93 0.03 0.06
2018 2.78 -4.10 -1.32 -1.23

 

9


 

Core Bond Fund

Financial Statements

Statement of Net Assets
As of September 30, 2018

The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
U. S. Government and Agency Obligations (46.5%)      
U. S. Government Securities (16.5%)        
  United States Treasury Note/Bond 1.125% 2/28/19 3,800 3,781
  United States Treasury Note/Bond 1.500% 2/28/19 1,200 1,196
  United States Treasury Note/Bond 1.250% 3/31/19 11,100 11,036
  United States Treasury Note/Bond 1.625% 3/31/19 1,700 1,693
  United States Treasury Note/Bond 1.250% 4/30/19 600 596
  United States Treasury Note/Bond 1.625% 6/30/19 2,250 2,235
  United States Treasury Note/Bond 1.000% 10/15/19 5,000 4,915
  United States Treasury Note/Bond 1.000% 11/30/19 1,700 1,667
  United States Treasury Note/Bond 1.500% 11/30/19 2,500 2,466
  United States Treasury Note/Bond 1.875% 12/31/19 2,920 2,890
  United States Treasury Note/Bond 2.000% 1/31/20 1,100 1,089
  United States Treasury Note/Bond 1.625% 3/15/20 5,200 5,117
  United States Treasury Note/Bond 1.125% 3/31/20 2,500 2,440
  United States Treasury Note/Bond 1.375% 3/31/20 2,200 2,155
  United States Treasury Note/Bond 2.375% 4/30/20 2,800 2,783
  United States Treasury Note/Bond 1.625% 6/30/20 1,500 1,470
  United States Treasury Note/Bond 1.375% 8/31/20 1,025 998
  United States Treasury Note/Bond 1.250% 3/31/21 1,000 962
  United States Treasury Note/Bond 2.250% 4/30/21 2,300 2,265
  United States Treasury Note/Bond 1.375% 5/31/21 5,000 4,809
  United States Treasury Note/Bond 2.625% 6/15/21 330 328
  United States Treasury Note/Bond 1.125% 7/31/21 800 762
  United States Treasury Note/Bond 2.125% 8/15/21 6,600 6,463
  United States Treasury Note/Bond 2.000% 8/31/21 900 878
  United States Treasury Note/Bond 2.125% 9/30/21 7,000 6,848
  United States Treasury Note/Bond 1.250% 10/31/21 4,000 3,808
  United States Treasury Note/Bond 2.000% 10/31/21 18,900 18,407
  United States Treasury Note/Bond 1.875% 9/30/22 1,800 1,729
  United States Treasury Note/Bond 2.000% 11/30/22 5,076 4,890
  United States Treasury Note/Bond 2.375% 1/31/23 7,500 7,329
  United States Treasury Note/Bond 2.750% 4/30/23 8,100 8,034
  United States Treasury Note/Bond 2.750% 7/31/23 700 694
  United States Treasury Note/Bond 1.625% 10/31/23 2,000 1,875
  United States Treasury Note/Bond 2.250% 12/31/23 2,300 2,221
1 United States Treasury Note/Bond 2.750% 2/15/24 1,900 1,880
  United States Treasury Note/Bond 2.125% 9/30/24 1,800 1,715

 

10


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
  United States Treasury Note/Bond 2.750% 6/30/25 3,000 2,953
  United States Treasury Note/Bond 1.625% 2/15/26 3 3
  United States Treasury Note/Bond 1.625% 5/15/26 3,000 2,714
  United States Treasury Note/Bond 2.250% 8/15/27 200 188
  United States Treasury Note/Bond 2.875% 5/15/28 2,479 2,442
  United States Treasury Note/Bond 6.125% 8/15/29 1,500 1,922
  United States Treasury Note/Bond 4.500% 5/15/38 1,000 1,200
  United States Treasury Note/Bond 3.500% 2/15/39 350 369
  United States Treasury Note/Bond 4.375% 11/15/39 630 747
  United States Treasury Note/Bond 4.625% 2/15/40 425 521
  United States Treasury Note/Bond 3.750% 8/15/41 650 709
  United States Treasury Note/Bond 3.125% 11/15/41 600 594
  United States Treasury Note/Bond 3.125% 2/15/42 650 643
  United States Treasury Note/Bond 2.750% 8/15/42 130 120
  United States Treasury Note/Bond 3.625% 8/15/43 2,200 2,360
  United States Treasury Note/Bond 2.875% 8/15/45 1,550 1,459
  United States Treasury Note/Bond 2.750% 11/15/47 9,000 8,236
2 United States Treasury Note/Bond 3.125% 5/15/48 11,500 11,342
          162,946
Agency Bonds and Notes (5.3%)        
3 AID-Israel 0.000% 11/1/24 1,300 1,064
3 AID-Ukraine 1.844% 5/16/19 1,700 1,702
4 Federal Home Loan Banks 1.250% 1/16/19 100 100
4 Federal Home Loan Banks 1.375% 5/28/19 300 298
5 Federal National Mortgage Assn. 0.000% 2/1/19 800 794
5 Federal National Mortgage Assn. 0.875% 8/2/19 450 444
5 Federal National Mortgage Assn. 0.000% 10/9/19 9,600 9,333
5 Federal National Mortgage Assn. 2.875% 9/12/23 2,400 2,383
5 Federal National Mortgage Assn. 1.875% 9/24/26 5,600 5,087
  Government Trust Certificate 0.000% 10/1/20 1,479 1,390
  Private Export Funding Corp. 4.375% 3/15/19 128 129
  Private Export Funding Corp. 1.450% 8/15/19 2,715 2,686
  Private Export Funding Corp. 2.250% 3/15/20 567 562
  Private Export Funding Corp. 2.300% 9/15/20 150 148
  Private Export Funding Corp. 3.550% 1/15/24 1,000 1,017
  Residual Funding Corp. Principal Strip 0.000% 1/15/21 1,700 1,589
  Resolution Funding Corp. Interest Strip 0.000% 4/15/26 2,480 1,930
  Resolution Funding Corp. Interest Strip 0.000% 1/15/27 2,760 2,080
  Resolution Funding Corp. Interest Strip 0.000% 4/15/27 1,800 1,347
  Resolution Funding Corp. Interest Strip 0.000% 7/15/27 794 589
  Resolution Funding Corp. Interest Strip 0.000% 10/15/27 794 583
  Resolution Funding Corp. Interest Strip 0.000% 4/15/28 3,000 2,160
  Resolution Funding Corp. Principal Strip 0.000% 10/15/19 1,300 1,264
  Resolution Funding Corp. Principal Strip 0.000% 7/15/20 6,520 6,199
  Resolution Funding Corp. Principal Strip 0.000% 10/15/20 3,000 2,832
4 Tennessee Valley Authority 2.250% 3/15/20 1,700 1,685
4 Tennessee Valley Authority Principal Strip 0.000% 11/1/25 3,000 2,362
          51,757
Conventional Mortgage-Backed Securities (18.7%)      
5,6 Fannie Mae Pool 2.000% 1/1/32 2,098 1,968
5,6 Fannie Mae Pool 2.500% 2/1/28–10/1/33 10,227 9,871
5,6 Fannie Mae Pool 3.000% 2/1/27–10/1/48 16,105 15,512
5,6,7 Fannie Mae Pool 3.500% 3/1/27–10/1/48 19,307 19,108
5,6,7 Fannie Mae Pool 4.000% 10/1/33–10/1/48 15,001 15,213

 

11


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
5,6,7 Fannie Mae Pool 4.500% 1/1/41–10/1/48 14,465 14,970
5,6 Fannie Mae Pool 5.000% 3/1/38–10/1/48 6,127 6,510
5,6 Fannie Mae Pool 6.000% 5/1/37 696 768
5,6 Freddie Mac Gold Pool 2.500% 8/1/31–10/1/33 1,641 1,585
5,6,7 Freddie Mac Gold Pool 3.000% 9/1/32–12/1/47 14,145 13,751
5,6,7 Freddie Mac Gold Pool 3.500% 3/1/45–10/1/48 20,599 20,325
5,6,7 Freddie Mac Gold Pool 4.000% 1/1/46–10/1/48 8,697 8,791
5,6 Freddie Mac Gold Pool 4.500% 7/1/47 2,261 2,351
6 Ginnie Mae I Pool 3.000% 4/15/45 466 452
6 Ginnie Mae I Pool 3.500% 6/15/47 1,726 1,725
6 Ginnie Mae I Pool 4.000% 7/15/45–8/15/45 203 207
6 Ginnie Mae I Pool 4.500% 2/15/39–9/15/46 1,141 1,205
6 Ginnie Mae I Pool 5.000% 3/15/38–10/1/48 2,647 2,840
6 Ginnie Mae II Pool 3.000% 5/20/43–10/1/48 6,991 6,791
6 Ginnie Mae II Pool 3.500% 10/20/43–11/1/48 22,066 21,996
6,7 Ginnie Mae II Pool 4.000% 11/20/42–10/1/48 11,269 11,459
6,7 Ginnie Mae II Pool 4.500% 11/20/44–10/1/48 6,460 6,703
          184,101
Nonconventional Mortgage-Backed Securities (6.0%)      
5,6,8 Fannie Mae Pool 4.048% 12/1/40 144 152
5,6 Fannie Mae REMICS 3.000% 5/25/47–9/25/48 4,146 3,994
5,6,9 Fannie Mae REMICS 2005-45 2.586% 6/25/35 95 95
5,6,9 Fannie Mae REMICS 2005-95 2.626% 11/25/35 101 102
5,6,9 Fannie Mae REMICS 2006-46 2.536% 6/25/36 353 354
5,6,9 Fannie Mae REMICS 2007-4 2.661% 2/25/37 40 40
5,6,9 Fannie Mae REMICS 2012-122 2.616% 11/25/42 131 132
5,10 Fannie Mae REMICS 2012-125 3.500% 11/25/42 29,509 6,194
5,6,9 Fannie Mae REMICS 2013-19 2.516% 9/25/41 172 172
5,6,9 Fannie Mae REMICS 2013-39 2.566% 5/25/43 167 167
5,6,9 Fannie Mae REMICS 2015-22 2.516% 4/25/45 138 138
5,6,11 Fannie Mae REMICS 2015-8 3.884% 3/25/45 19,663 3,446
5,6,9 Fannie Mae REMICS 2016-55 2.716% 8/25/46 285 289
5,6,9 Fannie Mae REMICS 2016-60 2.466% 9/25/46 561 560
5,6,9 Fannie Mae REMICS 2016-62 2.616% 9/25/46 576 575
5,6,9 Fannie Mae REMICS 2016-93 2.566% 12/25/46 1,136 1,134
5,6 Fannie Mae REMICS 2017-109 3.500% 11/25/45 777 775
5,6 Fannie Mae REMICS 2018-13 3.000% 3/25/48 1,932 1,875
5,6 Fannie Mae REMICS 2018-15 3.500% 10/25/44 906 902
5,6 Fannie Mae REMICS 2018-58 3.000% 8/25/48 2,734 2,605
5,6 Fannie Mae REMICS 2018-65 3.000% 9/25/48 2,546 2,429
5,6 Freddie Mac Non Gold Pool 4.060% 7/1/33 76 80
5,6,8 Freddie Mac Non Gold Pool 4.082% 9/1/37 482 508
5,6,8 Freddie Mac Non Gold Pool 4.448% 7/1/35 563 594
5,6,9 Freddie Mac REMICS 2.508% 11/15/36–8/15/43 265 266
5,6,9 Freddie Mac REMICS 2.518% 11/15/36 95 95
5,6,9 Freddie Mac REMICS 2.608% 6/15/42 48 48
5,6 Freddie Mac REMICS 3.000% 11/25/47–12/15/47 3,298 3,207
5,6,11 Freddie Mac REMICS 3.992% 9/15/47 32,762 5,469
6 Ginnie Mae REMICS 3.000% 12/20/47 1,280 1,254
6,11 Ginnie Mae REMICS 3.985% 6/20/47 4,814 772
10 Ginnie Mae REMICS 4.000% 1/20/45–8/20/46 29,758 5,537
10 Ginnie Mae REMICS 4.500% 5/20/45 17,536 3,766
6 Government National Mortgage Association        
  GNR_18-14 3.000% 12/20/47 1,005 980

 

12


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 Government National Mortgage Association        
  GNR_18-92 3.500% 7/20/48 2,786 2,769
6 Government National Mortgage Association        
  GNR_18-94 3.000% 7/20/48 5,086 4,924
6 Government National Mortgage Association        
  GNR_18-97 3.500% 7/20/48 2,786 2,770
          59,169
Total U.S. Government and Agency Obligations (Cost $472,504)     457,973
Asset-Backed/Commercial Mortgage-Backed Securities (13.7%)      
6 Ally Auto Receivables Trust 2017-5 2.220% 10/17/22 180 176
6 Ally Master Owner Trust Series 2017-3 2.040% 6/15/22 350 343
6 Ally Master Owner Trust Series 2018-2 3.290% 5/15/23 860 860
6,12 American Homes 4 Rent 2014-SFR3 3.678% 12/17/36 93 92
12 American Tower Trust #1 3.652% 3/23/48 260 255
6 AmeriCredit Automobile Receivables        
  Trust 2014-2 2.180% 6/8/20 9 9
6 AmeriCredit Automobile Receivables        
  Trust 2015-3 3.340% 8/8/21 285 286
6 AmeriCredit Automobile Receivables        
  Trust 2016-2 3.650% 5/9/22 125 125
6 AmeriCredit Automobile Receivables        
  Trust 2016-3 2.710% 9/8/22 200 197
6 AmeriCredit Automobile Receivables        
  Trust 2016-4 2.410% 7/8/22 225 221
6 AmeriCredit Automobile Receivables        
  Trust 2018-2 4.010% 7/18/24 390 390
6,12 Applebee’s Funding LLC/IHOP Funding LLC 4.277% 9/5/44 35 34
6,12 ARL Second LLC 2014-1A 2.920% 6/15/44 55 54
6,12 Aventura Mall Trust 2013-AVM 3.867% 12/5/32 800 809
6,12 Aventura Mall Trust 2018-AVM 4.112% 7/5/40 700 713
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2013-2A 2.970% 2/20/20 479 479
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2015-2A 2.630% 12/20/21 380 374
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2016-1A 2.990% 6/20/22 500 493
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2017-1A 3.070% 9/20/23 355 346
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2017-2A 2.970% 3/20/24 180 174
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2018-1A 3.700% 9/20/24 270 269
6,12 Avis Budget Rental Car Funding AESOP        
  LLC 2018-1A 4.730% 9/20/24 100 100
6 Banc of America Commercial Mortgage        
  Trust 2015-UBS7 3.705% 9/15/48 160 160
6 Banc of America Commercial Mortgage        
  Trust 2017-BNK3 3.574% 2/15/50 20 20
6 BANK 2017 - BNK4 3.625% 5/15/50 45 45
6 BANK 2017 - BNK5 3.390% 6/15/60 60 58
6 BANK 2017 - BNK6 3.254% 7/15/60 90 86
6 BANK 2017 - BNK6 3.518% 7/15/60 100 98
6 BANK 2017 - BNK6 3.741% 7/15/60 50 49

 

13


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 BANK 2017 - BNK7 3.435% 9/15/60 100 97
6 BANK 2017 - BNK8 3.488% 11/15/50 230 224
6 BANK 2017 - BNK9 3.538% 11/15/54 655 638
6 BANK 2018 - BN13 4.217% 8/15/61 240 246
6 BANK 2018 - BNK10 3.688% 2/15/61 240 237
6 BANK 2018-BN14 4.185% 9/15/60 25 26
6 BANK 2018-BN14 4.231% 9/15/60 300 310
  Bank of Nova Scotia 1.875% 4/26/21 610 589
6 BENCHMARK 2018-B1 Mortgage Trust 3.666% 1/15/51 140 139
6 BENCHMARK 2018-B1 Mortgage Trust 3.878% 1/15/51 70 70
6 BENCHMARK 2018-B1 Mortgage Trust 4.059% 1/15/51 220 219
6 BENCHMARK 2018-B1 Mortgage Trust 4.256% 1/15/51 340 334
6 BENCHMARK 2018-B2 Mortgage Trust 3.882% 2/15/51 800 805
6 BENCHMARK 2018-B3 Mortgage Trust 4.025% 4/10/51 140 142
6 BENCHMARK 2018-B5 Mortgage Trust 4.208% 7/15/51 190 196
6 Benchmark 2018-B6 Mortgage Trust 4.170% 11/10/51 69 71
6 Benchmark 2018-B6 Mortgage Trust 4.261% 11/10/51 300 311
6 BMW Vehicle Lease Trust 2017-2 2.070% 10/20/20 280 277
6 BMW Vehicle Lease Trust 2017-2 2.190% 3/22/21 90 89
6,12 CAL Funding II Ltd. Series 2018-2A 4.340% 9/25/43 280 281
6 California Republic Auto Receivables        
  Trust 2016-2 2.520% 5/16/22 210 206
6 California Republic Auto Receivables        
  Trust 2016-2 3.510% 3/15/23 210 208
6,12 Canadian Pacer Auto Receivables Trust A        
  Series 2017 2.050% 3/19/21 140 139
6,12 Canadian Pacer Auto Receivables Trust A        
  Series 2017 2.286% 1/19/22 100 98
6,12 Canadian Pacer Auto Receivables Trust A        
  Series 2018 3.220% 9/19/22 140 139
  Capital Auto Receivables Asset Trust 2016-2 3.160% 11/20/23 220 219
6 Capital Auto Receivables Asset Trust 2016-3 2.350% 9/20/21 50 49
6 Capital Auto Receivables Asset Trust 2016-3 2.650% 1/20/24 40 40
6,12 Capital Auto Receivables Asset Trust 2017-1 2.220% 3/21/22 130 128
6 CarMax Auto Owner Trust 2016-2 2.160% 12/15/21 100 98
6 CarMax Auto Owner Trust 2016-2 3.250% 11/15/22 100 99
6 CarMax Auto Owner Trust 2016-3 1.900% 4/15/22 200 194
6 CarMax Auto Owner Trust 2016-3 2.200% 6/15/22 190 185
6 CarMax Auto Owner Trust 2016-3 2.940% 1/17/23 190 187
6 CarMax Auto Owner Trust 2017-4 2.110% 10/17/22 150 148
6 CarMax Auto Owner Trust 2017-4 2.330% 5/15/23 90 88
6 CarMax Auto Owner Trust 2017-4 2.460% 8/15/23 40 39
6 CarMax Auto Owner Trust 2017-4 2.700% 10/16/23 40 39
6 CarMax Auto Owner Trust 2018-1 2.640% 6/15/23 50 49
6 CarMax Auto Owner Trust 2018-1 2.830% 9/15/23 90 88
6 CarMax Auto Owner Trust 2018-1 2.950% 11/15/23 50 49
6 CarMax Auto Owner Trust 2018-2 3.370% 10/16/23 90 90
6 CarMax Auto Owner Trust 2018-2 3.570% 12/15/23 130 129
6 CarMax Auto Owner Trust 2018-2 3.990% 4/15/25 100 99
6 CD 2016-CD1 Commercial Mortgage Trust 3.631% 8/10/49 270 252
6 CD 2017-CD3 Commercial Mortgage Trust 3.631% 2/10/50 140 139
6 CD 2017-CD4 Commercial Mortgage Trust 3.514% 5/10/50 80 78
6 CD 2017-CD5 Commercial Mortgage Trust 3.431% 8/15/50 105 102
6 CD 2017-CD6 Commercial Mortgage Trust 3.456% 11/13/50 45 44

 

14


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 CFCRE Commercial Mortgage Trust 2016-C4 3.283% 5/10/58 61 58
6,12 Chesapeake Funding II LLC 2016-2A 1.880% 6/15/28 266 265
6,12 Chesapeake Funding II LLC 2018-1 3.040% 4/15/30 600 598
6,12 Chrysler Capital Auto Receivables        
  Trust 2014-BA 3.440% 8/16/21 200 200
6,12 Chrysler Capital Auto Receivables        
  Trust 2016-AA 2.880% 6/15/22 90 90
6,12 Chrysler Capital Auto Receivables        
  Trust 2016-AA 4.220% 2/15/23 90 91
6,12 Chrysler Capital Auto Receivables        
  Trust 2016-BA 1.870% 2/15/22 20 20
6 Citigroup Commercial Mortgage        
  Trust 2013-GC15 4.371% 9/10/46 30 31
6 Citigroup Commercial Mortgage        
  Trust 2014-GC19 4.023% 3/10/47 370 378
6 Citigroup Commercial Mortgage        
  Trust 2014-GC21 3.575% 5/10/47 311 313
6 Citigroup Commercial Mortgage        
  Trust 2014-GC23 3.622% 7/10/47 350 350
6 Citigroup Commercial Mortgage        
  Trust 2014-GC23 4.175% 7/10/47 230 232
6 Citigroup Commercial Mortgage        
  Trust 2014-GC25 3.372% 10/10/47 10 10
6 Citigroup Commercial Mortgage        
  Trust 2014-GC25 3.635% 10/10/47 360 359
6 Citigroup Commercial Mortgage        
  Trust 2014-GC25 4.345% 10/10/47 140 139
6 Citigroup Commercial Mortgage        
  Trust 2014-GC25 4.680% 10/10/47 175 168
6 Citigroup Commercial Mortgage        
  Trust 2015-GC27 3.137% 2/10/48 228 221
6 Citigroup Commercial Mortgage        
  Trust 2015-GC31 3.762% 6/10/48 110 110
6 Citigroup Commercial Mortgage        
  Trust 2015-GC33 3.778% 9/10/58 410 412
6 Citigroup Commercial Mortgage        
  Trust 2016-C1 3.209% 5/10/49 141 135
6 Citigroup Commercial Mortgage        
  Trust 2017-C4 3.471% 10/12/50 100 97
6 Citigroup Commercial Mortgage        
  Trust 2017-P8 3.465% 9/15/50 230 223
6 Citigroup Commercial Mortgage        
  Trust 2017-P8 4.192% 9/15/50 60 60
6 Citigroup Commercial Mortgage        
  Trust 2017-P8 4.413% 9/15/50 60 59
6 Citigroup Commercial Mortgage        
  Trust 2018-C5 4.228% 6/10/51 110 113
6,12 CKE Restaurants Holdings Inc 2018-1A 5.710% 6/20/48 580 582
6,9,12 Colony American Homes 2015-1 3.658% 7/17/32 70 70
6,9,12 Colony American Homes 2015-1A 3.358% 7/17/32 172 172
6,9,12 Colony Starwood Homes 2016-1A Trust 3.658% 7/17/33 298 298
6,9,12 Colony Starwood Homes 2016-1A Trust 4.308% 7/17/33 115 115
6,12 COMM 2012-CCRE3 Mortgage Trust 3.416% 10/15/45 40 39
6 COMM 2012-CCRE4 Mortgage Trust 3.251% 10/15/45 500 488

 

15


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 COMM 2013-CCRE12 Mortgage Trust 3.765% 10/10/46 60 61
6 COMM 2013-CCRE12 Mortgage Trust 4.046% 10/10/46 500 512
6 COMM 2013-CCRE13 Mortgage Trust 4.194% 11/10/46 230 237
6,12 COMM 2013-CCRE6 Mortgage Trust 3.147% 3/10/46 150 145
6,12 COMM 2013-CCRE6 Mortgage Trust 3.397% 3/10/46 210 205
6 COMM 2013-CCRE8 Mortgage Trust 3.612% 6/10/46 10 10
6,12 COMM 2013-CCRE9 Mortgage Trust 4.399% 7/10/45 230 229
6,12 COMM 2014-277P Mortgage Trust 3.732% 8/10/49 100 100
6 COMM 2014-CCRE14 Mortgage Trust 4.236% 2/10/47 20 21
6 COMM 2014-CCRE15 Mortgage Trust 4.074% 2/10/47 350 359
6 COMM 2014-CCRE17 Mortgage Trust 3.700% 5/10/47 20 20
6 COMM 2014-CCRE17 Mortgage Trust 3.977% 5/10/47 350 357
6 COMM 2014-CCRE17 Mortgage Trust 4.898% 5/10/47 190 191
6 COMM 2014-CCRE18 Mortgage Trust 3.550% 7/15/47 30 30
  COMM 2014-CCRE20 Mortgage Trust 3.326% 11/10/47 20 20
6 COMM 2014-CCRE20 Mortgage Trust 3.590% 11/10/47 350 350
6 COMM 2014-CCRE21 Mortgage Trust 3.528% 12/10/47 50 50
6 COMM 2015-CCRE22 Mortgage Trust 3.309% 3/10/48 228 223
6 COMM 2015-CCRE25 Mortgage Trust 3.759% 8/10/48 120 121
6 COMM 2015-LC19 Mortgage Trust 3.183% 2/10/48 124 121
6 CSAIL 2015-C4 Commercial Mortgage Trust 3.808% 11/15/48 358 359
6 CSAIL 2016-C7 Commercial Mortgage Trust 3.502% 11/15/49 60 58
6 CSAIL 2017-C8 Commercial Mortgage Trust 3.392% 6/15/50 115 111
6 CSAIL 2018-CX12 Commercial Mortgage        
  Trust 4.224% 8/15/51 540 555
6,12 DB Master Finance LLC 2015-1A 3.980% 2/20/45 58 58
6 DBJPM 16-C1 Mortgage Trust 3.503% 5/10/49 140 130
6 DBJPM 17-C6 Mortgage Trust 3.328% 6/10/50 160 155
6,12 Dell Equipment Finance Trust 2017-2 1.970% 2/24/20 148 148
6,12 Dell Equipment Finance Trust 2017-2 2.190% 10/24/22 130 129
12 DNB Boligkreditt AS 2.500% 3/28/22 340 330
6,12 DRB Prime Student Loan Trust 2017-C 2.810% 11/25/42 370 359
6,12 Drive Auto Receivables Trust 2015-AA 3.060% 5/17/21 63 63
6,12 Drive Auto Receivables Trust 2015-DA 4.590% 1/17/23 132 134
6,12 Drive Auto Receivables Trust 2016-BA 4.530% 8/15/23 200 203
6,12 Drive Auto Receivables Trust 2016-C 2.370% 11/16/20 4 4
6,12 Drive Auto Receivables Trust 2016-C 4.180% 3/15/24 90 91
6 Drive Auto Receivables Trust 2017-1 3.840% 3/15/23 50 50
6 Drive Auto Receivables Trust 2017-3 2.300% 5/17/21 260 260
6 Drive Auto Receivables Trust 2017-3 2.800% 7/15/22 330 329
6 Drive Auto Receivables Trust 2018-2 3.220% 4/15/22 360 360
6 Drive Auto Receivables Trust 2018-2 3.630% 8/15/24 560 561
6 Drive Auto Receivables Trust 2018-2 4.140% 8/15/24 390 391
6 Drive Auto Receivables Trust 2018-3 3.370% 9/15/22 490 490
6 Drive Auto Receivables Trust 2018-3 3.720% 9/16/24 480 481
6 Drive Auto Receivables Trust 2018-3 4.300% 9/16/24 260 262
6,12 ELFI Graduate Loan Program 2018-A LLC 3.430% 8/25/42 310 308
5,6,9 Fannie Mae Connecticut Avenue Securities        
  2016-C04 3.666% 1/25/29 83 83
5,6,9 Fannie Mae Connecticut Avenue Securities        
  2016-C05 3.566% 1/25/29 125 125
5,6 Fannie Mae Grantor Trust 2017-T1 2.898% 6/25/27 20 19
6,9 First National Master Note Trust 2017-2 2.598% 10/16/23 250 250
6,12 Flagship Credit Auto Trust 2016-4 1.960% 2/16/21 84 84

 

16


 

Core Bond Fund        
 
 
 
        Face Market
      Maturity Amount Value
    Coupon Date ($000) ($000)
6 Ford Credit Auto Lease Trust 2017-B 2.170% 2/15/21 240 237
6 Ford Credit Auto Lease Trust 2018-A 3.170% 9/15/21 220 219
6,12 Ford Credit Auto Owner Trust 2014-REV1 2.410% 11/15/25 250 249
6,12 Ford Credit Auto Owner Trust 2014-REV2 2.510% 4/15/26 200 199
6 Ford Credit Auto Owner Trust 2016-B 1.850% 9/15/21 200 197
6,12 Ford Credit Auto Owner Trust 2017-1 2.620% 8/15/28 450 438
6,12 Ford Credit Auto Owner Trust 2017-2 2.360% 3/15/29 650 624
6,12 Ford Credit Auto Owner Trust 2017-2 2.600% 3/15/29 120 115
6,12 Ford Credit Auto Owner Trust 2017-2 2.750% 3/15/29 250 239
6,12 Ford Credit Auto Owner Trust 2018-2 3.470% 1/15/30 430 429
6,12 Ford Credit Auto Owner Trust 2018-2 3.610% 1/15/30 260 258
6,12 Ford Credit Auto Owner Trust 2018-2 3.760% 1/15/30 120 119
6,12 Ford Credit Auto Owner Trust 2018-REV1 3.190% 7/15/31 250 243
6,12 Ford Credit Auto Owner Trust 2018-REV1 3.340% 7/15/31 100 97
6 Ford Credit Floorplan Master Owner Trust A        
  Series 2014-2 2.310% 2/15/21 200 200
6 Ford Credit Floorplan Master Owner Trust A        
  Series 2017-1 2.070% 5/15/22 1,050 1,033
6 Ford Credit Floorplan Master Owner Trust A        
  Series 2017-2 2.160% 9/15/22 1,030 1,011
5,6,9 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2016-DNA3 4.216% 12/25/28 206 209
5,6,12 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2018-SPI1 3.745% 2/25/48 158 157
5,6,12 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2018-SPI2 3.820% 5/25/48 188 187
5,6,12 Freddie Mac Structured Agency Credit Risk        
  Debt Notes 2018-SPI3 4.168% 8/25/48 120 120
6,12 FRS I LLC 2013-1A 3.080% 4/15/43 181 181
6 GM Financial Automobile Leasing Trust        
  2016-2 2.580% 3/20/20 190 190
6 GM Financial Automobile Leasing Trust        
  2017-2 2.180% 6/21/21 90 89
6 GM Financial Automobile Leasing Trust        
  2017-3 2.010% 11/20/20 200 198
6 GM Financial Automobile Leasing Trust        
  2017-3 2.120% 9/20/21 80 79
6 GM Financial Automobile Leasing Trust        
  2017-3 2.400% 9/20/21 80 79
6 GM Financial Automobile Leasing Trust        
  2017-3 2.730% 9/20/21 40 39
6,12 GM Financial Consumer Automobile 2017-3 2.130% 3/16/23 150 146
6,12 GM Financial Consumer Automobile 2017-3 2.330% 3/16/23