N-CSR 1 a19-22238_3ncsr.htm N-CSR

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT

OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number: 811-05628

 

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, 2018—September 30, 2019

 


 

Item 1: Reports to Shareholders

 


 

 

 

 

Annual Report  | September 30, 2019

 

 

Vanguard U.S. Value Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.

 

 


 

Important information about access to shareholder reports

 

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

 

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.

 

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

 

 

 

 

Contents

 

 

 

 

 

A Note From Our Chairman

1

 

 

Your Fund’s Performance at a Glance

2

 

 

Advisor’s Report

3

 

 

About Your Fund’s Expenses

5

 

 

Performance Summary

7

 

 

Financial Statements

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 


 

A Note From Our Chairman

 

 

 

 

 

Tim Buckley

Chairman and Chief Executive Officer

 

 

 

 

 

Dear Shareholder,

 

Recent volatility in financial markets—affecting stocks, bonds, and commodities—has been a good reminder of the wise old adage, “Never keep all your eggs in one basket.” Maintaining balance and diversification in your investment portfolio can help to both limit risk and set you up for long-term success.

 

It’s understandable why some investors might become complacent after a long market run-up like the one that lifted stock prices, especially U.S. stock prices, in the years following the global financial crisis. But failing to rebalance regularly can leave a portfolio with a much different mix of assets than intended and, often, more risk than intended.

 

Balance across and diversification within asset classes are powerful tools for managing risk and achieving your investment goals. A portfolio’s allocation will determine a large portion of its long-term return and also the majority of its volatility risk. A well-diversified portfolio is less vulnerable to significant swings in the performance of any one segment of the asset classes in which it invests.

 

Balance and diversification will never eliminate the risk of loss, nor will they guarantee positive returns in a declining market. But they should reduce the chance that you’ll suffer disproportionate losses in one particular high-flying asset class or sector when it comes back to earth. And exposure to all key market components should give you at least some participation in the sectors that are performing best at any given time.

 

Vanguard is committed to helping you achieve balance and diversification in your portfolios to help meet your investment goals. We thank you for your continued loyalty.

 

Sincerely,

 

Mortimer J. Buckley

Chairman and Chief Executive Officer

October 14, 2019

 

1


 

Your Fund’s Performance at a Glance

 

 

 

·     Vanguard U.S. Value Fund posted a return of about —3% for the 12 months ended September 30, 2019, well below the performance of its benchmark, the Russell 3000 Value Index, which had a positive return of more than 3% for the period

 

·     The broad U.S. stock market as measured by the Russell 3000 Index returned nearly 3% during the period. While stocks endured stretches of volatility at the end of 2018 and during the spring of 2019, performance was boosted by the accommodative stance of the Federal Reserve. The Fed cut interest rates in August and September in response to a softening economy.

 

·     Information technology was the only sector that contributed positively to performance on a relative basis. Energy, industrial, and health care stocks detracted most.

 

·     Over the ten years ended September 30, 2019, the fund’s average annual return of 11.39% was slightly above that of its benchmark.

 

 

 

Market Barometer

 

 

 

 

Average Annual Total Returns

 

Periods Ended September 30, 2019

 

One Year

Three Years

Five Years

Stocks

 

 

 

Russell 1000 Index (Large-caps)

3.87%

13.19%

10.62%

Russell 2000 Index (Small-caps)

-8.89

8.23

8.19

Russell 3000 Index (Broad U.S. market)

2.92

12.83

10.44

FTSE All-World ex US Index (International)

-1.12

6.46

3.24

 

 

 

 

Bonds

 

 

 

Bloomberg Barclays U.S. Aggregate Bond Index

 

 

 

(Broad taxable market)

10.30%

2.92%

3.38%

Bloomberg Barclays Municipal Bond Index

 

 

 

(Broad tax-exempt market)

8.55

3.19

3.66

FTSE Three-Month U.S. Treasury Bill Index

2.36

1.52

0.95

 

 

 

 

CPI

 

 

 

Consumer Price Index

1.71%

2.07%

1.53%

 

2


 

Advisor’s Report

 

 

For the 12 months ended September 30, 2019, Vanguard U.S. Value Fund posted a return of about —3%, well below the return of its benchmark index, the Russell 3000 Value Index.

 

Investment objective and strategy

Although it’s important to understand how overall performance is affected by macroeconomic factors, 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 or decision models: 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 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.

 

Investment environment

The recent macroeconomic environment—characterized by high economic and policy uncertainty, low GDP growth, and low interest rates—has contributed to some extraordinary trends in the equity markets. These trends are not unusual at the late stage of a business cycle and include:

 

· Value underperformance. We’ve seen the longest stretch of value underperformance since the dot-com bubble burst in 2000. Investors have been flocking to high-growth-potential companies with the hope of higher returns without necessarily looking at the underlying earnings. As a result, these companies are trading at inflated valuations that increasingly diverge from those of value companies.

 

· Sentiment rules. The equity market has mostly been trading on sentiment, with investors reacting to macroeconomic shocks such as tariffs and Federal Reserve interest rate announcements while largely ignoring fundamentals (quality, growth, etc.) since spring 2018.

 

· “Junk” rally. A big junk rally in which stocks with high valuations and low-quality earnings outperform began in January. It has been a risk-on and fundamental-off market, in which investors give up safety for returns.

 

3


 

While market environments such as the one we’ve experienced can be challenging for investors, it is crucial to maintain a long-term focus. These market conditions are not unusual at the late stage of a business cycle, and investors should expect to experience them at least once during their investment life.

 

As with any other form of active equity management, our strategies are designed to deliver long-term outperformance. Often, quantitatively driven funds are among the first to bounce back after a drop in the markets and can weather unpredictable markets by staying focused on the historical trends and in-depth data analysis performed regularly by expert portfolio managers, analysts, and traders.

 

Our successes and failures

Against this backdrop, the fund underperformed across the board as all five of our decision models did not perform as expected, and ten of the fund’s 11 industry sectors detracted from performance on a relative basis. Only information technology added to performance while energy, industrials, and health care were the biggest detractors.

 

The portfolio benefited from its holdings in information technology stocks Enphase Energy, Booz Allen Hamilton, and Electro Scientific Industries. The greatest shortfalls came from Mallinckrodt in health care, Tailored Brands in consumer discretionary, and Universal Insurance Holdings in financials.

 

We continue to believe that constructing a portfolio focused on the fundamentals we’ve described will benefit investors over the long term, although we recognize that markets can reward or punish us in the near term. We believe the fund offers a strong mix of stocks with attractive valuation and growth characteristics.

 

 

Portfolio Managers:

 

James P. Stetler

 

Binbin Guo, Principal, Head of

Alpha Equity Investments

 

Vanguard Quantitative Equity Group

 

October 18, 2019

 

4


 

About Your Fund’s Expenses

 

 

 

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

 

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

The accompanying table illustrates your fund’s costs in two ways:

 

·     Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

 

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading “Expenses Paid During Period.”

 

·     Based on hypothetical 5% yearly return. This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

 

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

 

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

 

5


 

Six Months Ended September 30, 2019

 

 

 

 

Beginning

Ending

Expenses

 

Account Value

Account Value

Paid During

U.S. Value Fund

3/31/2019

9/30/2019

Period

Based on Actual Fund Return

$1,000.00

$1,027.92

$1.12

Based on Hypothetical 5% Yearly Return

1,000.00

1,023.97

1.12

 

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 0.22%. 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).

 

6


 

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, 2009, Through September 30, 2019

Initial Investment of $10,000

 

 

 

 

 

Average Annual Total Returns

 

 

 

Periods Ended September 30, 2019

 

 

 

 

 

 

Final Value

 

 

One

Five

Ten

of a $10,000

 

 

Year

Years

Years

Investment

U.S. Value Fund

-2.98%

6.71%

11.39%

$29,397

Russell 3000 Value Index

3.10

7.76

11.36

29,336

Dow Jones U.S. Total Stock Market Float Adjusted Index

2.81

10.40

13.09

34,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Financial Highlights for dividend and capital gains information.

 

7


 

U.S. Value Fund

 

 

 

Sector Diversification

As of September 30, 2019

 

Communication Services

 

7.7

%

Consumer Discretionary

 

6.6

 

Consumer Staples

 

8.6

 

Energy

 

8.3

 

Financials

 

24.0

 

Health Care

 

12.1

 

Industrials

 

9.9

 

Information Technology

 

6.1

 

Materials

 

4.2

 

Real Estate

 

5.7

 

Utilities

 

6.8

 

 

The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The 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 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.

 

8


 

U.S. Value Fund

 

 

Financial Statements

 

 

Statement of Net Assets

As of September 30, 2019

 

The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

Common Stocks (99.5%)1

 

 

Communication Services (7.6%)

 

 

 

Verizon Communications Inc.

390,178

23,551

 

AT&T Inc.

523,836

19,822

 

Walt Disney Co.

116,813

15,223

 

Comcast Corp. Class A

304,245

13,715

*

Discovery Communications Inc. Class A

287,571

7,658

 

New York Times Co. Class A

229,783

6,544

*

T-Mobile US Inc.

67,771

5,338

 

CenturyLink Inc.

321,929

4,018

 

News Corp. Class B

182,235

2,605

 

Sinclair Broadcast Group Inc. Class A

41,621

1,779

 

Fox Corp. Class A

55,012

1,735

*

Glu Mobile Inc.

312,253

1,558

 

Telephone & Data Systems Inc.

53,439

1,379

*

Bandwidth Inc. Class A 20

20,773

1,353

 

TEGNA Inc.

79,331

1,232

*

United States Cellular Corp.

29,991

1,127

*

Discovery Communications Inc.

35,934

885

 

News Corp. Class A

50,656

705

 

Fox Corp. Class B

22,271

702

 

 

 

110,929

Consumer Discretionary (6.5%)

 

 

 

Home Depot Inc.

46,169

10,712

 

Whirlpool Corp.

54,037

8,557

 

Gentex Corp.

290,292

7,993

 

Brinker International Inc.

175,159

7,474

 

Rent-A-Center Inc.

266,840

6,882

*,^

YETI Holdings Inc.

218,522

6,119

 

Best Buy Co. Inc.

87,831

6,060

 

McDonald’s Corp.

26,141

5,613

 

Carnival Corp.

117,386

5,131

*

frontdoor Inc.

105,261

5,113

*

Genesco Inc.

103,922

4,159

 

Yum! Brands Inc.

27,639

3,135

 

Expedia Group Inc.

20,261

2,723

*

Stoneridge Inc.

80,727

2,500

 

Lear Corp.

20,934

2,468

 

Standard Motor Products Inc.

31,812

1,545

*

American Axle & Manufacturing Holdings Inc.

145,783

1,198

*

AutoZone Inc.

772

837

*

Deckers Outdoor Corp.

5,425

799

*

K12 Inc.

30,137

796

*

Under Armour Inc. Class C

42,469

770

 

Las Vegas Sands Corp.

12,474

721

 

Signet Jewelers Ltd.

42,624

714

 

Dine Brands Global Inc.

9,390

712

*

Modine Manufacturing Co.

62,644

712

*

1-800-Flowers.com Inc. Class A

40,399

598

 

 

 

94,041

Consumer Staples (8.6%)

 

 

 

Procter & Gamble Co.

216,996

26,990

 

Philip Morris International Inc.

253,984

19,285

 

Walmart Inc.

132,912

15,774

 

PepsiCo Inc.

77,170

10,580

 

Bunge Ltd.

143,599

8,131

 

Molson Coors Brewing Co. Class B

126,312

7,263

 

Campbell Soup Co.

141,283

6,629

 

Coty Inc. Class A

597,585

6,281

*

TreeHouse Foods Inc.

111,529

6,184

 

Casey’s General Stores Inc.

31,867

5,136

*

Edgewell Personal Care Co.

151,831

4,933

*

US Foods Holding Corp.

78,406

3,222

 

Kimberly-Clark Corp.

16,132

2,291

^

B&G Foods Inc.

67,753

1,281

 

 

 

123,980

 

9


 

U.S. Value Fund

 

 

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

Energy (8.3%)

 

 

 

Chevron Corp.

263,716

31,277

 

Exxon Mobil Corp.

388,922

27,462

 

ConocoPhillips

257,893

14,695

 

Devon Energy Corp.

332,036

7,989

 

Occidental Petroleum Corp.

169,454

7,536

*

Southwestern Energy Co.

3,719,332

7,178

 

HollyFrontier Corp.

130,111

6,979

*

W&T Offshore Inc.

1,134,668

4,958

 

Range Resources Corp.

949,275

3,626

 

Phillips 66

27,425

2,808

 

Valero Energy Corp.

30,714

2,618

 

Cabot Oil & Gas Corp.

51,486

905

*

Continental Resources Inc.

25,935

798

*

CONSOL Energy Inc.

42,615

666

 

Delek US Holdings Inc.

12,227

444

 

 

 

119,939

Financials (23.9%)

 

 

 

JPMorgan Chase & Co.

390,091

45,910

*

Berkshire Hathaway Inc. Class B

167,775

34,900

 

Bank of America Corp.

1,154,489

33,676

 

Citigroup Inc.

217,792

15,045

 

Wells Fargo & Co.

282,515

14,250

 

Allstate Corp.

117,135

12,730

 

Capital One Financial Corp.

138,994

12,646

 

MetLife Inc.

232,985

10,988

 

American Express Co.

90,841

10,745

 

Ally Financial Inc.

307,578

10,199

 

Fifth Third Bancorp

363,719

9,959

 

Regions Financial Corp.

614,456

9,721

 

Discover Financial Services

116,698

9,463

 

Synchrony Financial

276,354

9,421

 

Ameriprise Financial Inc.

62,878

9,249

 

Aflac Inc.

168,343

8,808

 

AXA Equitable Holdings Inc.

388,784

8,615

 

OFG Bancorp

380,221

8,327

 

Zions Bancorp NA

183,761

8,181

 

Hanover Insurance Group Inc.

59,764

8,100

 

Progressive Corp.

83,293

6,434

 

Comerica Inc.

89,763

5,923

 

Unum Group

182,016

5,409

 

Navient Corp.

416,359

5,329

 

Popular Inc.

92,006

4,976

*

Brighthouse Financial Inc.

113,410

4,590

 

Erie Indemnity Co. Class A

21,971

4,079

 

FNB Corp.

284,976

3,286

 

Universal Insurance Holdings Inc.

104,809

3,143

 

Radian Group Inc.

132,231

3,020

*

Athene Holding Ltd. Class A

54,524

2,293

 

Walker & Dunlop Inc.

29,961

1,676

 

Primerica Inc.

10,922

1,390

 

First Horizon National Corp.

70,037

1,135

 

OneMain Holdings Inc.

25,615

940

 

US Bancorp

13,462

745

 

Morgan Stanley

16,775

716

 

 

 

346,017

Health Care (12.1%)

 

 

 

Johnson & Johnson

231,223

29,916

 

Abbott Laboratories

204,950

17,148

 

Pfizer Inc.

383,094

13,765

 

Anthem Inc.

50,374

12,095

*

IQVIA Holdings Inc.

71,153

10,629

 

Bristol-Myers Squibb Co.

195,841

9,931

 

Merck & Co. Inc.

116,773

9,830

 

McKesson Corp.

67,825

9,269

 

Cooper Cos. Inc.

30,759

9,135

 

HCA Healthcare Inc.

67,342

8,109

 

Cardinal Health Inc.

158,846

7,496

*

Integer Holdings Corp.

94,435

7,136

 

Medtronic plc

56,807

6,170

 

Danaher Corp.

27,864

4,024

 

Amgen Inc.

16,037

3,103

*

Medpace Holdings Inc.

35,233

2,961

*

Syneos Health Inc.

49,504

2,634

 

Eli Lilly & Co.

18,858

2,109

 

Thermo Fisher Scientific Inc.

7,055

2,055

*

Enanta Pharmaceuticals Inc.

30,245

1,817

*,^

Mallinckrodt plc

651,539

1,570

*

AMAG Pharmaceuticals Inc.

122,911

1,420

*,^

Intrexon Corp.

229,669

1,314

 

Owens & Minor Inc.

185,151

1,076

 

 

 

174,712

Industrials (9.9%)

 

 

 

Honeywell International Inc.

80,563

13,631

 

L3Harris Technologies Inc.

51,911

10,831

*

United Airlines Holdings Inc.

116,786

10,325

 

General Electric Co.

1,125,501

10,062

*

FTI Consulting Inc.

87,268

9,249

 

10


 

U.S. Value Fund

 

 

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

 

WW Grainger Inc.

28,276

8,402

 

Caterpillar Inc.

65,272

8,244

 

Spirit AeroSystems Holdings Inc. Class A

100,085

8,231

 

Lockheed Martin Corp.

19,777

7,714

*

Aerojet Rocketdyne Holdings Inc.

141,967

7,171

 

Pentair plc

148,117

5,599

*

Builders FirstSource Inc.

261,585

5,382

 

Landstar System Inc.

38,366

4,319

 

AGCO Corp.

52,338

3,962

 

Macquarie Infrastructure Corp.

92,497

3,651

 

Triumph Group Inc.

132,811

3,039

*

WESCO International Inc.

60,136

2,873

 

United Technologies Corp.

20,867

2,849

 

ArcBest Corp.

86,175

2,624

 

Expeditors International of Washington Inc.

30,014

2,230

*

GMS Inc.

71,327

2,048

*

BMC Stock Holdings Inc.

67,221

1,760

*

JetBlue Airways Corp.

91,085

1,526

 

Allison Transmission Holdings Inc.

32,313

1,520

 

Nielsen Holdings plc

45,923

976

 

PACCAR Inc.

13,678

958

*

Hub Group Inc. Class A

19,751

918

*

Echo Global Logistics Inc.

37,389

847

 

Delta Air Lines Inc.

13,136

757

 

Heidrick & Struggles International Inc.

27,371

747

*

Foundation Building Materials Inc.

48,218

747

 

 

 

143,192

Information Technology (6.0%)

 

 

 

Intel Corp.

383,654

19,770

 

Booz Allen Hamilton Holding Corp. Class A

119,493

8,486

 

HP Inc.

386,126

7,306

*

CACI International Inc. Class A

30,175

6,978

*

Dell Technologies Inc.

126,010

6,535

 

QUALCOMM Inc.

82,982

6,330

*

Enphase Energy Inc.

263,285

5,853

*

Tech Data Corp.

43,184

4,502

*

Synaptics Inc.

82,165

3,283

*

SunPower Corp. Class A

263,324

2,889

*

Diebold Nixdorf Inc.

257,001

2,878

*

Cardtronics plc Class A

86,554

2,617

*

ON Semiconductor Corp.

129,696

2,491

 

Avnet Inc.

51,281

2,281

*

SMART Global Holdings Inc.

53,288

1,358

 

International Business Machines Corp.

8,059

1,172

*

Teradata Corp.

31,306

970

*

eGain Corp.

107,212

858

*

Unisys Corp.

97,678

726

 

 

 

87,283

Materials (4.2%)

 

 

 

CF Industries Holdings Inc.

206,205

10,145

 

Ecolab Inc.

43,500

8,615

 

Ball Corp.

112,265

8,174

*

Element Solutions Inc.

719,200

7,322

 

Reliance Steel & Aluminum Co.

62,462

6,225

 

International Paper Co.

115,361

4,824

 

Domtar Corp.

99,425

3,560

 

Linde plc

12,212

2,366

 

FMC Corp.

25,100

2,201

 

Valvoline Inc.

98,321

2,166

*

Allegheny Technologies Inc.

95,305

1,930

 

Dow Inc.

38,534

1,836

 

Owens-Illinois Inc.

118,402

1,216

 

 

 

60,580

Real Estate (5.7%)

 

 

 

Spirit Realty Capital Inc.

200,026

9,573

 

Essex Property Trust Inc.

28,710

9,378

 

Medical Properties Trust Inc.

475,548

9,302

 

EPR Properties

108,875

8,368

 

Brixmor Property Group Inc.

393,410

7,982

 

Park Hotels & Resorts Inc.

266,018

6,643

 

HCP Inc.

177,498

6,324

 

Ventas Inc.

55,949

4,086

 

Omega Healthcare Investors Inc.

86,154

3,600

 

Hannon Armstrong Sustainable Infrastructure Capital Inc.

123,045

3,587

 

Lexington Realty Trust Class B

294,082

3,014

 

SITE Centers Corp.

164,527

2,486

 

Macerich Co.

63,231

1,998

 

Equity Commonwealth

43,148

1,478

 

Regency Centers Corp.

20,257

1,408

 

CoreCivic Inc.

66,922

1,157

 

Equity Residential

12,674

1,093

 

Kennedy-Wilson Holdings Inc.

37,564

823

 

 

 

82,300

 

11


 

U.S. Value Fund

 

 

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

Utilities (6.7%)

 

 

 

Southern Co.

245,343

15,155

 

Exelon Corp.

283,033

13,673

 

FirstEnergy Corp.

240,593

11,604

 

NRG Energy Inc.

241,775

9,574

 

AES Corp.

578,792

9,457

 

Vistra Energy Corp.

327,595

8,757

 

Ameren Corp.

64,491

5,163

 

Eversource Energy

53,531

4,575

 

Evergy Inc.

59,952

3,990

 

Entergy Corp.

24,642

2,892

 

Duke Energy Corp.

29,624

2,840

 

IDACORP Inc.

22,155

2,496

 

NextEra Energy Inc.

10,610

2,472

 

ALLETE Inc.

22,165

1,937

 

Hawaiian Electric Industries Inc.

31,520

1,438

 

PNM Resources Inc.

15,267

795

 

Clearway Energy Inc. Class A

45,607

791

 

 

 

97,609

Total Common Stocks (Cost $1,236,797)

 

1,440,582

Temporary Cash Investments (2.2%)1

 

 

Money Market Fund (2.1%)

 

 

2,3

Vanguard Market Liquidity Fund, 2.098%

306,381

30,641

 

 

 

Face

 

 

 

Amount

 

 

 

($000)

 

U.S. Government and Agency Obligations (0.1%)

 

 

4

United States Treasury Bill, 1.931%, 11/29/19

400

399

Total Temporary Cash Investments (Cost $31,039)

31,040

 

Total Investments (101.7%) (Cost $1,267,836)

1,471,622

 

 

 

Amount

 

($000)

Other Assets and Liabilities (-1.7%)

 

Other Assets

 

Investment in Vanguard

67

Receivables for Investment Securities Sold

3,232

Receivables for Accrued Income

2,020

Receivables for Capital Shares Issued

381

Variation Margin Receivable— Futures Contracts

37

Other Assets4

675

Total Other Assets

6,412

Liabilities

 

Payables for Investment Securities Purchased

(4,434)

Collateral for Securities on Loan

(8,324)

Payables for Capital Shares Redeemed

(1,238)

Payables to Vanguard

(806)

Other Liabilities

(15,853)

Total Liabilities

(30,655)

Net Assets (100%)

 

Applicable to 80,237,132 outstanding $.001 par value shares of beneficial interest (unlimited authorization)

1,447,379

Net Asset Value Per Share

$18.04

 

 

At September 30, 2019, net assets consisted of:

 

 

Amount

 

($000)

Paid-in Capital

1,207,852

Total Distributable Earnings (Loss)

239,527

Net Assets

1,447,379

 

·       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 $7,957,000.

 

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 1.7%, 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 $8,324,000 of collateral received for securities on loan.

 

4   Securities with a value of $399,000 and cash of $15,000 have been segregated as initial margin for open futures contracts.

 

12


 

U.S. Value Fund

 

 

 

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 2019

49

7,297

(64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

13


 

U.S. Value Fund

 

 

Statement of Operations

 

 

 

 

Year Ended

 

September 30, 2019

 

($000)

Investment Income

 

Income

 

Dividends

37,745

Interest1

134

Securities Lending—Net

1,795

Total Income

39,674

Expenses

 

The Vanguard Group—Note B

 

Investment Advisory Services

1,213

Management and Administrative

1,848

Marketing and Distribution

162

Custodian Fees

11

Auditing Fees

32

Shareholders’ Reports

27

Trustees’ Fees and Expenses

1

Total Expenses

3,294

Net Investment Income

36,380

Realized Net Gain (Loss)

 

Investment Securities Sold1

11,837

Futures Contracts

5

Realized Net Gain (Loss)

11,842

Change in Unrealized Appreciation (Depreciation)

 

Investment Securities1

(106,092)

Futures Contracts

(56)

Change in Unrealized Appreciation (Depreciation)

(106,148)

Net Increase (Decrease) in Net Assets Resulting from Operations

(57,926)

 

1   Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $122,000, $3,000, and $1,000, respectively. Purchases and sales are for temporary cash investment purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

14


 

U.S. Value Fund

 

 

Statement of Changes in Net Assets

 

 

 

Year Ended September 30,

 

2019

2018

 

($000)

($000)

Increase (Decrease) in Net Assets

 

 

Operations

 

 

Net Investment Income

36,380

32,402

Realized Net Gain (Loss)

11,842

81,508

Change in Unrealized Appreciation (Depreciation)

(106,148)

50,866

Net Increase (Decrease) in Net Assets Resulting from Operations

(57,926)

164,776

Distributions

 

 

Net Investment Income

(32,254)

(32,253)

Realized Capital Gain1

(71,059)

(97,416)

Total Distributions

(103,313)

(129,669)

Capital Share Transactions

 

 

Issued

184,404

214,440

Issued in Lieu of Cash Distributions

96,928

121,791

Redeemed

(364,718)

(354,645)

Net Increase (Decrease) from Capital Share Transactions

(83,386)

(18,414)

Total Increase (Decrease)

(244,625)

16,693

Net Assets

 

 

Beginning of Period

1,692,004

1,675,311

End of Period

1,447,379

1,692,004

 

1   Includes fiscal 2019 and 2018 short-term gain distributions totaling $0 and $22,953,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

15


 

U.S. Value Fund

 

 

Financial Highlights

 

 

For a Share Outstanding

 

 

Year Ended September 30,

Throughout Each Period

2019

2018

2017

2016

2015

Net Asset Value, Beginning of Period

$20.03

$19.63

$17.25

$16.48

$16.95

Investment Operations

 

 

 

 

 

Net Investment Income

.4321

.3731

.4371

.440

.355

Net Realized and Unrealized Gain (Loss) on Investments

(1.176)

1.563

2.606

1.341

(.543)

Total from Investment Operations

(.744)

1.936

3.043

1.781

(.188)

Distributions

 

 

 

 

 

Dividends from Net Investment Income

(.389)

(.382)

(.386)

(.358)

(.282)

Distributions from Realized Capital Gains

(.857)

(1.154)

(.277)

(.653)

Total Distributions

(1.246)

(1.536)

(.663)

(1.011)

(.282)

Net Asset Value, End of Period

$18.04

$20.03

$19.63

$17.25

$16.48

 

 

 

 

 

 

Total Return2

-2.98%

10.22%

17.87%

11.09%

-1.18%

 

 

 

 

 

 

Ratios/Supplemental Data

 

 

 

 

 

Net Assets, End of Period (Millions)

$1,447

$1,692

$1,675

$1,374

$1,215

Ratio of Total Expenses to Average Net Assets

0.22%

0.22%

0.23%

0.23%

0.26%

Ratio of Net Investment Income to Average Net Assets

2.43%

1.92%

2.36%

2.63%

2.10%

Portfolio Turnover Rate

61%

75%

95%

76%

66%

 

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.

 

16


 

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 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, 2019, the fund’s average investments in long and short futures contracts represented 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, 2016–2019), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

17


 

U.S. Value 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. 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 $4.3 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, 2019, 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.

 

18


 

U.S. Value Fund

 

 

 

 

 

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, distribution, and cash management 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, 2019, the fund had contributed to Vanguard capital in the amount of $67,000, representing less than 0.01% of the fund’s net assets and 0.03% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

 

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

 

Level 1—Quoted prices in active markets for identical securities.

 

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

 

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

 

The following table summarizes the market value of the fund’s investments and derivatives as of September 30, 2019, based on the inputs used to value them:

 

 

Level 1

Level 2

Level 3

Investments

($000)

($000)

($000)

Common Stocks

1,440,582

Temporary Cash Investments

30,641

399

Futures Contracts—Assets1

37

Total

1,471,260

399

 

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, permanent differences primarily attributable to the accounting for distributions in connection with fund share redemptions were reclassified between the following accounts:

 

 

Amount

 

($000)

Paid-in Capital

1,731

Total Distributable Earnings (Loss)

(1,731)

 

19


 

U.S. Value Fund

 

 

 

 

 

Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the 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 total distributable earnings (loss) are detailed in the table as follows:

 

 

Amount

 

($000)

Undistributed Ordinary Income

24,945

Undistributed Long-Term Gains

11,450

Capital Loss Carryforwards (Non-expiring)

Net Unrealized Gains (Losses)

203,779

 

As of September 30, 2019, 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

1,267,843

Gross Unrealized Appreciation

264,556

Gross Unrealized Depreciation

(60,777)

Net Unrealized Appreciation (Depreciation)

203,779

 

 

E.  During the year ended September 30, 2019, the fund purchased $918,939,000 of investment securities and sold $1,065,427,000 of investment securities, other than temporary cash investments.

 

F.  Capital shares issued and redeemed were:

 

 

Year Ended September 30,

 

2019

2018

 

Shares

Shares

 

(000)

(000)

Issued

10,484

11,008

Issued in Lieu of Cash Distributions

6,009

6,353

Redeemed

(20,731)

(18,245)

Net Increase (Decrease) in Shares Outstanding

(4,238)

(884)

 

 

G. Management has determined that no events or transactions occurred subsequent to September 30, 2019, that would require recognition or disclosure in these financial statements.

 

20


 

Report of Independent Registered

Public Accounting Firm

 

To the Board of Trustees of Vanguard 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, 2019, the related statement of operations for the year ended September 30, 2019, the statement of changes in net assets for each of the two years in the period ended September 30, 2019, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2019 (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, 2019, 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, 2019 and the financial highlights for each of the five years in the period ended September 30, 2019 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, 2019 by correspondence with the custodian 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 13, 2019

 

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

 

21


 

 

Special 2019 tax information (unaudited) for Vanguard U.S. Value Fund

 

This information for the fiscal year ended September 30, 2019, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $71,485,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.

 

The fund distributed $29,943,000 of qualified dividend income to shareholders during the fiscal year.

 

For corporate shareholders, 96.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

 

22


 

The People Who Govern Your Fund

 

 

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them.

 

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 212 Vanguard funds.

 

Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

 

 

Interested Trustee1

 

Mortimer J. Buckley

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2019–present) of Vanguard and of each of the investment companies served by Vanguard; 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) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; trustee (2018–present) of The Shipley School.

 

 

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. 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.

 

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), and the Lumina Foundation.

 

 

1 Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

 


 

Director of the V Foundation and Oxfam America. 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) 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). Board of advisors and investment committee member of the Museum of Fine Arts Boston. Board member (2018–present) of RIT Capital Partners (investment firm); investment committee member of Partners Health Care System.

 

Sarah Bloom Raskin

Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubinstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College.

 

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).

 

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.

 

John E. Schadl

Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (May 2019–present) of Vanguard Marketing Corporation.

 

 

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

 


 

 

 

 

 

 

 

 

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 Morningstar, Inc., unless otherwise noted.

 

You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.

 

You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.

 

Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2019, Bloomberg. All rights reserved.

 

 

 

 

 

© 2019 The Vanguard Group, Inc.

 

All rights reserved.

 

Vanguard Marketing Corporation, Distributor.

 

 

 

Q1240 112019

 


 

 

 

 

Annual Report  | September 30, 2019

 

 

Vanguard Capital Value Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.

 

 


 

Important information about access to shareholder reports

 

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

 

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.

 

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

 

 

 

Contents

 

 

 

 

 

A Note From Our Chairman

1

 

 

Your Fund’s Performance at a Glance

2

 

 

Advisor’s Report

3

 

 

About Your Fund’s Expenses

6

 

 

Performance Summary

8

 

 

Financial Statements

10

 

 

 

 

 

 

 

 

 

 

 

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

 


 

A Note From Our Chairman

 

 

 

 

Tim Buckley

 

Chairman and Chief Executive Officer

 

 

 

 

Dear Shareholder,

 

Recent volatility in financial markets—affecting stocks, bonds, and commodities—has been a good reminder of the wise old adage, “Never keep all your eggs in one basket.” Maintaining balance and diversification in your investment portfolio can help to both limit risk and set you up for long-term success.

 

It’s understandable why some investors might become complacent after a long market run-up like the one that lifted stock prices, especially U.S. stock prices, in the years following the global financial crisis. But failing to rebalance regularly can leave a portfolio with a much different mix of assets than intended and, often, more risk than intended.

 

Balance across and diversification within asset classes are powerful tools for managing risk and achieving your investment goals. A portfolio’s allocation will determine a large portion of its long-term return and also the majority of its volatility risk. A well-diversified portfolio is less vulnerable to significant swings in the performance of any one segment of the asset classes in which it invests.

 

Balance and diversification will never eliminate the risk of loss, nor will they guarantee positive returns in a declining market. But they should reduce the chance that you’ll suffer disproportionate losses in one particular high-flying asset class or sector when it comes back to earth. And exposure to all key market components should give you at least some participation in the sectors that are performing best at any given time.

 

Vanguard is committed to helping you achieve balance and diversification in your portfolios to help meet your investment goals. We thank you for your continued loyalty.

 

Sincerely,

 

 

Mortimer J. Buckley

Chairman and Chief Executive Officer

October 14, 2019

 

1


 

Your Fund’s Performance at a Glance

 

 

·             Vanguard Capital Value Fund returned –0.18% for the 12 months ended September 30, 2019, lagging its benchmark, the Russell 3000 Value Index, which returned 3.10%.

 

·             The broad U.S. stock market advanced nearly 3% for the year, which was marked by sharp intervals of volatility and uncertainty. Investors fretted over U.S.-China trade, heightened tensions with Iran, the imbroglio over Britain’s exit from the European Union, and whether an inverted yield curve signaled a recession ahead. With an eye toward the deteriorating global economic outlook, the Federal Reserve lowered short-term interest rates twice during the period to sustain the U.S. economic recovery.

 

·             Large- and mid-capitalization stocks generally outdistanced their small-cap counterparts.

 

·             The advisor’s strong selections in communication services made that sector the largest contributor to returns. The fund’s holdings in consumer staples, energy, health care, and financials lagged their benchmark counterparts and detracted most from relative results.

 

 

 

Market Barometer

 

 

 

 

Average Annual Total Returns

 

Periods Ended September 30, 2019

 

One Year

Three Years

Five Years

Stocks

 

 

 

Russell 1000 Index (Large-caps)

3.87%

13.19%

10.62%

Russell 2000 Index (Small-caps)

-8.89

8.23

8.19

Russell 3000 Index (Broad U.S. market)

2.92

12.83

10.44

FTSE All-World ex US Index (International)

-1.12

6.46

3.24

 

 

 

 

Bonds

 

 

 

Bloomberg Barclays U.S. Aggregate Bond Index

 

 

 

(Broad taxable market)

10.30%

2.92%

3.38%

Bloomberg Barclays Municipal Bond Index

 

 

 

(Broad tax-exempt market)

8.55

3.19

3.66

FTSE Three-Month U.S. Treasury Bill Index

2.36

1.52

0.95

 

 

 

 

CPI

 

 

 

Consumer Price Index

1.71%

2.07%

1.53%

 

2


 

Advisor’s Report

 

 

For the 12 months ended September 30, 2019, Vanguard Capital Value Fund returned –0.18%, underperforming its benchmark, the Russell 3000 Value Index, which returned 3.10%.

 

The investment environment

 

Seven of the 11 sectors in the index posted positive returns and six sectors in the fund beat the return of the index as a whole. For the fund, the utilities, real estate, consumer discretionary, communication services, and information technology sectors exceeded the benchmark return by a wide margin, while industrials narrowly led the benchmark return. All other sectors for the fund trailed the benchmark’s result. Energy, consumer staples, health care, and financials posted negative returns.

 

Our shortfalls

 

Security selection drove relative underperformance. Weak selection in consumer staples, energy, and financials was partially offset by strong selection in communication services and industrials. Sector allocation also weighed on relative performance. The fund’s underweight allocation to utilities and overweight to energy detracted from results.

 

Within consumer staples, our holding of Walgreens Boots Alliance and British American Tobacco (BAT) hurt relative performance, as did our not holding Procter & Gamble. Walgreens traded down amid challenges for the drug retail industry as well as concerns about the Walgreens and Boots Alliance merger.

 

BAT has faced headwinds from faster-than-expected volume declines, competition from e-cigarettes and next-generation products, increased Food and Drug Administration regulation—specifically of menthol cigarettes—and increased balance sheet leverage on the back of an acquisition of Reynolds. We ultimately eliminated the name as our thesis about pricing and next-generation efforts offsetting volume declines was disproven.

 

We did not hold Procter & Gamble based on valuation discipline, because the company had been trading at a premium to industry peers.

 

In energy, our holdings of exploration and production companies Concho Resources and Cimarex Energy drove underperformance, along with our position in Halliburton.

 

Concho Resources, the fund’s largest detractor, reported disappointing second-quarter results and guidance for the balance of the year. Several poor operating decisions and cost inflation led to a production shortfall and increased expenses. Shares of Cimarex Energy declined as the company reported weak second-quarter results. In addition to lower-than-expected oil production guidance, the company contended with lower oil and natural gas prices because of pipeline constraints in the Permian Basin.

 

Shares of Halliburton and other oilfield services companies dropped during the period. Halliburton, a diversified provider

 

3


 

with a large market share in U.S. onshore shale drilling and completion areas, has seen a sharp stock pullback as customers scaled back capital spending plans. While customers’ oilfield spending can fluctuate widely, we anticipate an eventual tightening of Halliburton’s services markets as providers reduce capacity to better align with customer demand. In the meantime, we believe the company’s diversification and capital structure will allow it to maintain its equipment fleet while smaller competitors are forced to raid the cupboards for cash.

 

Our successes

 

Communication services marked an area of strength, with Comcast and Verizon contributing the most to relative results. Comcast shares rose during the period as the cable giant continued to exceed estimates on its high-speed internet business. Comcast also has gained traction with its message that the decline of traditional TV subscribers will hurt profits less than expected. Verizon demonstrated an encouraging trend of improving organic growth in its wireless services revenues. Investors also started to factor in benefits from the transition to 5G wireless, including new product offerings and uses, and the potential for different industry dynamics if T-Mobile and Sprint execute their merger plans.

 

Industrials also contributed to results, driven notably by Herman Miller and Johnson Controls. Herman Miller experienced strong sales and accelerating earnings growth in office furniture, equipment, and home furnishings. We continue to believe the company is moving from a period of apathy and compressed margins to one of operating leverage and pricing power. Johnson Controls, a manufacturer of HVAC and fire and security equipment, won investor favor by selling its Power Solutions battery business and redeploying capital into a large share buyback. Management also began focusing on improving operational execution to drive profitability.

 

Fund positioning and outlook

 

At the end of September, the fund’s most significant overweightings relative to the Russell 3000 Value Index were in the information technology, real estate, and materials sectors. The most notable shifts in active positioning over the period—a function of bottom-up stock selection—included increases to our information technology, communication services, and health care weights, and reductions in our consumer staples, utilities, and financials weights.

 

Notable new purchases during the period included CVS Health, Intel, Raymond James, Humana, and Carter’s. CVS Health is an integrated pharmacy health care provider that should benefit from the recent combination with Aetna. The stock was sold down as the market questioned CVS’s ability to successfully integrate Aetna, but after a rocky start, we have been encouraged by management’s execution. With Intel, we took advantage of near-term weakness to accumulate a position. We believe its data center business will reaccelerate once its cloud

 

4


 

customers digest excess inventory and return to an order pattern that better matches their processing needs.

 

With Raymond James, we had an opportunity to add a best-in-class company at a depressed multiple because of broader industry headwinds. The company has meaningfully improved its competitive positioning and offers some of the highest organic growth among peers. Shares of Humana, which is primarily focused on the Medicare Advantage program for older adults, have been pressured by “Medicare-for-all” proposals in the platforms of several Democratic presidential candidates. We believe this is a harsh overreaction to a very unlikely outcome, and we felt positive underlying fundamentals had created a good opportunity to initiate a position.

 

Carter’s, the owner of its eponymous brand as well as OshKosh B’gosh, Skip Hop, and other labels, came under selling pressure as investors worried about the potential imposition of 25% tariffs on the company’s China-sourced infant, toddler, and children’s apparel. The stock was trading at a discounted valuation relative to its long-term history, which we believe ignored the potential to adjust sourcing and supply chains prospectively.

 

Notable eliminations included Wells Fargo, PNC Financial, RenaissanceRe, AIG, and Walgreens Boots Alliance. We shed PNC Financial, AIG, and RenaissanceRe because they achieved our valuation targets and we found more compelling opportunities elsewhere. We abandoned Wells Fargo and Walgreens Boots Alliance because our thesis for each was disproven.

 

There is discussion in the financial press, and even within Wellington, about the multiyear underperformance of value stocks relative to their growth counterparts. Our team is working continuously to position the portfolio with stocks that are priced at a clear discount to their peers and to their fundamental value. At the same time, we are turning over every rock to find companies that are not only “cheap” on static metrics but that have a favorable future trajectory of sales, earnings, and distributable cash flows. We believe we have found an attractive balance of risk and reward in the fund as it is constructed today, and we have conviction that Vanguard investors will be well rewarded for their patience with value investing.

 

David W. Palmer, CFA

Senior Managing Director

and Equity Portfolio Manager

 

Wellington Management Company LLP

 

October 21, 2019

 

5


 

About Your Fund’s Expenses

 

 

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

 

A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

The accompanying table illustrates your fund’s costs in two ways:

 

·     Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

 

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading “Expenses Paid During Period.”

 

·     Based on hypothetical 5% yearly return. This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

 

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

 

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

 

6


 

Six Months Ended September 30, 2019

 

 

 

 

Beginning

Ending

Expenses

 

Account Value

Account Value

Paid During

Capital Value Fund

3/31/2019

9/30/2019

Period

Based on Actual Fund Return

$1,000.00

$1,056.74

$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).

 

7


 

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, 2009, Through September 30, 2019

 

Initial Investment of $10,000

 

 

 

 

 

Average Annual Total Returns

 

 

 

Periods Ended September 30, 2019

 

 

 

 

 

 

Final Value

 

 

One

Five

Ten

of a $10,000

 

 

Year

Years

Years

Investment

Capital Value Fund

-0.18%

3.10%

9.29%

$24,322

Russell 3000 Value Index

3.10

7.76

11.36

29,336

Dow Jones U.S. Total Stock Market Float Adjusted Index

2.81

10.40

13.09

34,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Financial Highlights for dividend and capital gains information.

 

8


 

Capital Value Fund

 

 

Sector Diversification

As of September 30, 2019

 

Communication Services

 

9.4

%

Consumer Discretionary

 

6.2

 

Consumer Staples

 

5.4

 

Energy

 

8.6

 

Financials

 

17.6

 

Health Care

 

12.0

 

Industrials

 

11.0

 

Information Technology

 

12.4

 

Materials

 

6.3

 

Other

 

0.0

 

Real Estate

 

9.0

 

Utilities

 

2.1

 

 

The table reflects the fund’s equity exposure, based on its investments in stocks. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

9


 

Capital Value Fund

 

 

Financial Statements

 

 

Statement of Net Assets

As of September 30, 2019

 

The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

Common Stocks (98.8%)

 

 

Communication Services (9.3%)

 

 

 

Comcast Corp. Class A

570,836

25,733

 

Verizon Communications Inc.

293,590

17,721

*

Electronic Arts Inc.

90,088

8,813

*

Alphabet Inc. Class A

7,050

8,609

*

Charter Communications Inc. Class A

19,800

8,160

*

T-Mobile US Inc.

67,500

5,317

 

 

 

74,353

Consumer Discretionary (6.1%)

 

 

 

Expedia Group Inc.

133,681

17,968

 

Carter’s Inc.

160,000

14,594

 

General Motors Co.

232,857

8,727

 

Steven Madden Ltd.

204,100

7,305

 

 

 

48,594

Consumer Staples (5.3%)

 

 

 

Philip Morris International Inc.

279,442

21,218

 

Kroger Co.

546,859

14,098

 

Archer-Daniels-Midland Co.

172,400

7,080

 

 

 

42,396

Energy (8.5%)

 

 

 

Chevron Corp.

141,561

16,789

 

Canadian Natural Resources Ltd.

509,661

13,572

 

Concho Resources Inc.

140,965

9,572

 

Diamondback Energy Inc.

71,877

6,463

 

Enbridge Inc.

163,800

5,746

 

Cimarex Energy Co.

114,307

5,480

 

Tenaris SA ADR

255,389

5,409

 

Halliburton Co.

253,847

4,785

 

 

 

67,816

Financials (17.4%)

 

 

 

MetLife Inc.

497,754

23,474

 

Raymond James Financial Inc.

200,600

16,541

 

Citigroup Inc.

237,898

16,434

 

Bank of America Corp.

529,000

15,431

 

Unum Group

350,128

10,406

 

TD Ameritrade Holding Corp.

202,900

9,475

*

Athene Holding Ltd. Class A

220,000

9,253

 

Voya Financial Inc.

142,428

7,754

 

Bank OZK

261,980

7,144

 

London Stock Exchange Group plc

68,817

6,180

 

CNO Financial Group Inc.

369,381

5,847

 

Atlantic Union Bankshares Corp.

148,100

5,516

 

Lancashire Holdings Ltd.

564,555

5,139

 

 

 

138,594

Health Care (11.9%)

 

 

 

CVS Health Corp.

362,873

22,886

 

Humana Inc.

62,700

16,031

 

McKesson Corp.

80,973

11,066

 

Koninklijke Philips NV

233,563

10,774

 

Bristol-Myers Squibb Co.

197,816

10,031

*

Centene Corp.

168,000

7,268

*

Biogen Inc.

27,283

6,352

 

AstraZeneca plc ADR

137,400

6,124

*

Seattle Genetics Inc.

49,321

4,212

 

 

 

94,744

Industrials (10.9%)

 

 

 

Wabtec Corp.

199,500

14,336

 

Steelcase Inc. Class A

652,155

12,000

 

Southwest Airlines Co.

212,757

11,491

 

Herman Miller Inc.

224,655

10,354

 

Fortune Brands Home & Security Inc.

180,130

9,853

 

Delta Air Lines Inc.

163,919

9,442

 

Sanwa Holdings Corp.

730,100

8,204

 

AO Smith Corp.

137,400

6,555

 

Pentair plc

120,800

4,566

 

Scorpio Bulkers Inc.

1

 

 

 

86,801

 

10


 

Capital Value Fund

 

 

 

 

Market

 

 

 

Value·

 

 

Shares

($000)

Information Technology (12.3%)

 

 

 

Intel Corp.

352,600

18,170

 

Western Digital Corp.

237,957

14,192

 

KLA Corp.

88,016

14,034

 

Samsung Electronics Co. Ltd.

261,016

10,687

 

Amdocs Ltd.

141,935

9,383

 

Genpact Ltd.

236,747

9,174

 

Broadcom Inc.

30,582

8,443

*

Coherent Inc.

48,258

7,418

*

Micron Technology Inc.

143,500

6,149

*

Qorvo Inc.

1

 

 

 

97,650

Materials (6.2%)

 

 

 

Reliance Steel & Aluminum Co.

142,730

14,224

 

Celanese Corp. Class A

106,155

12,982

 

CRH plc

223,412

7,661

 

Cabot Corp.

133,500

6,050

^

Nutrien Ltd.

102,300

5,096

*

Alcoa Corp.

167,800

3,368

 

 

 

49,381

Other (0.0%)

 

 

*,§,1

Allstar Co-Invest LLC Private Placement

NA

214

 

 

 

 

Real Estate (8.8%)

 

 

 

Equinix Inc.

21,317

12,296

 

Americold Realty Trust

330,300

12,244

 

Host Hotels & Resorts Inc.

637,677

11,025

 

Simon Property Group Inc.

50,450

7,853

 

Columbia Property Trust Inc.

361,539

7,647

 

Brixmor Property Group Inc.

362,312

7,351

 

Acadia Realty Trust

245,857

7,027

 

American Tower Corp.

23,016

5,089

 

 

 

70,532

Utilities (2.1%)

 

 

*

Iberdrola SA

853,556

8,872

 

Sempra Energy

53,977

7,967

 

 

 

16,839

Total Common Stocks
(Cost $737,618)

 

787,914

Temporary Cash Investments (1.8%)

 

 

Money Market Fund (0.6%)

 

 

2,3

Vanguard Market Liquidity Fund, 2.098%

50,512

5,052

 

 

 

Face

Market

 

 

Amount

Value·

 

 

($000)

($000)

Repurchase Agreement (1.2%)

 

 

 

RBS Securities, Inc. 2.350%, 10/1/19 (Dated 9/30/19, Repurchase Value $9,301,000, collateralized by U.S. Treasury Note/Bond 0.750%, 7/15/28, with a value of $9,486,000)

9,300

9,300

Total Temporary Cash Investments

(Cost $14,352)

 

14,352

Total Investments (100.6%)

(Cost $751,970)

 

802,266

 

 

 

 

 

Amount

 

 

($000)

Other Assets and Liabilities (-0.6%)

 

 

Other Assets

 

 

Investment in Vanguard

 

37

Receivables for Investment Securities Sold

 

8

Receivables for Accrued Income

 

1,564

Receivables for Capital Shares Issued

 

168

Unrealized Appreciation—Forward Currency Contracts

 

27

Other Assets

 

65

Total Other Assets

 

1,869

Liabilities

 

 

Collateral for Securities on Loan

 

(5,049)

Payables to Investment Advisor

 

(118)

Payables for Capital Shares Redeemed

 

(648)

Payables to Vanguard

 

(1,136)

Total Liabilities

 

(6,951)

Net Assets (100%)

 

 

Applicable to 59,464,555 outstanding $.001 par value shares of beneficial interest (unlimited authorization)

 

797,184

Net Asset Value Per Share

 

$13.41

 

11


 

Capital Value Fund

 

 

At September 30, 2019, net assets consisted of:

 

 

 

Amount

 

 

($000)

Paid-in Capital

 

739,406

Total Distributable Earnings (Loss)

 

57,778

Net Assets

 

797,184

·    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 $4,837,000.

§   Security value determined using significant unobservable inputs.

1   Restricted security represents 0.0% 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   Collateral of $5,049,000 was received for securities on loan.

ADR—American Depositary Receipt.

 

 

Restricted Securities as of Period End

 

 

 

Acquisition

 

Acquisition

Cost

Security Name

Date

($000)

Allstar Co-Invest LLC Private Placement

August 2011

459

 

 

Derivative Financial Instruments Outstanding as of Period End

 

Forward Currency Contracts

 

 

 

 

Counterparty

Contract

Settlement

Date

Contract Amount (000)

Unrealized

Appreciation

($000)

Unrealized

(Depreciation)

($000)

 

Receive

 

Deliver

Goldman Sachs International

12/18/19

USD

7,482

JPY

801,276

27

 

JPY—Japanese yen.

 

USD—U.S. dollar.

 

 

 

 

 

 

 

 

 

 

 

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

 

12


 

Capital Value Fund

 

 

Statement of Operations

 

 

 

Year Ended

 

September 30, 2019

 

($000)

Investment Income

 

Income

 

Dividends1

20,612

Interest2

183

Securities Lending—Net

31

Total Income

20,826

Expenses

 

Investment Advisory Fees—Note B

 

Basic Fee

1,775

Performance Adjustment

(1,334)

The Vanguard Group—Note C

 

Management and Administrative

1,689

Marketing and Distribution

69

Custodian Fees

8

Auditing Fees

32

Shareholders’ Reports

15

Trustees’ Fees and Expenses

1

Total Expenses

2,255

Net Investment Income

18,571

Realized Net Gain (Loss)

 

Investment Securities Sold2

11,271

Forward Currency Contracts

345

Foreign Currencies

(3)

Realized Net Gain (Loss)

11,613

Change in Unrealized Appreciation (Depreciation)

 

Investment Securities2

(37,282)

Forward Currency Contracts

(110)

Foreign Currencies

2

Change in Unrealized Appreciation (Depreciation)

(37,390)

Net Increase (Decrease) in Net Assets Resulting from Operations

(7,206)

 

1   Dividends are net of foreign withholding taxes of $316,000.

 

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. Purchases and sales are for temporary cash investment purposes.

 

 

 

 

 

 

 

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

 

13


 

Capital Value Fund

 

 

Statement of Changes in Net Assets

 

 

 

Year Ended September 30,

 

2019

2018

 

($000)

($000)

Increase (Decrease) in Net Assets

 

 

Operations

 

 

Net Investment Income

18,571

18,141

Realized Net Gain (Loss)

11,613

81,935

Change in Unrealized Appreciation (Depreciation)

(37,390)

(27,061)

Net Increase (Decrease) in Net Assets Resulting from Operations

(7,206)

73,015

Distributions

 

 

Net Investment Income

(18,899)

(17,678)

Realized Capital Gain

Total Distributions

(18,899)

(17,678)

Capital Share Transactions

 

 

Issued

72,817

57,634

Issued in Lieu of Cash Distributions

17,308

16,300

Redeemed

(140,330)

(159,126)

Net Increase (Decrease) from Capital Share Transactions

(50,205)

(85,192)

Total Increase (Decrease)

(76,310)

(29,855)

Net Assets

 

 

Beginning of Period

873,494

903,349

End of Period

797,184

873,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

14


 

Capital Value Fund

 

 

Financial Highlights

 

 

 

For a Share Outstanding

 

 

Year Ended September 30,

Throughout Each Period

2019

2018

2017

2016

2015

Net Asset Value, Beginning of Period

$13.79

$12.96

$11.50

$11.45

$15.32

Investment Operations

 

 

 

 

 

Net Investment Income

.2991

.2731

.2411

.180

.1291

Net Realized and Unrealized Gain (Loss) on Investments

(.377)

.817

1.420

1.060

(2.330)

Total from Investment Operations

(.078)

1.090

1.661

1.240

(2.201)

Distributions

 

 

 

 

 

Dividends from Net Investment Income

(.302)

(.260)

(.201)

(.144)

(.175)

Distributions from Realized Capital Gains

(1.046)

(1.494)

Total Distributions

(.302)

(.260)

(.201)

(1.190)

(1.669)

Net Asset Value, End of Period

$13.41

$13.79

$12.96

$11.50

$11.45

 

 

 

 

 

 

Total Return2

-0.18%

8.48%

14.56%

11.36%

-15.67%

 

 

 

 

 

 

Ratios/Supplemental Data

 

 

 

 

 

Net Assets, End of Period (Millions)

$797

$873

$903

$933

$1,059

Ratio of Total Expenses to Average Net Assets3

0.29%

0.29%

0.27%

0.25%

0.50%

Ratio of Net Investment Income to Average Net Assets

2.35%

2.04%

1.97%

1.51%

0.93%

Portfolio Turnover Rate

46%

47%

41%

134%

90%

1     Calculated based on average shares outstanding.

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

3     Includes performance-based investment advisory fee increases (decreases) of (0.17%), (0.17%), (0.19%), (0.20%), and 0.06%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

15


 

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

 

16


 

Capital Value Fund

 

 

 

 

assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any 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, 2019, the fund’s average investment in forward currency contracts represented 1% 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 counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any 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, 2016–2019), 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 agreements with its counterparties. The master securities lending agreements provide that, in the event of a

 

17


 

Capital Value Fund

 

 

 

 

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 $4.3 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, 2019, or at any time during the period then ended.

 

9. 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.   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, 2019, the investment advisory fee represented an effective annual basic rate of 0.22% of the fund’s average net assets before a decrease of $1,334,000 (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.

 

18


 

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, 2019, the fund had contributed to Vanguard capital in the amount of $37,000, representing less than 0.01% of the fund’s net assets and 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

 

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

 

Level 1—Quoted prices in active markets for identical securities.

 

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

 

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

 

The following table summarizes the market value of the fund’s investments and derivatives as of September 30, 2019, based on the inputs used to value them:

 

 

Level 1

Level 2

Level 3

Investments

($000)

($000)

($000)

Common Stocks

740,957

46,743

214

Temporary Cash Investments

5,052

9,300

Forward Currency Contracts—Assets

27

Total

746,009

56,070

214

 

 

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, permanent differences primarily attributable to the accounting for foreign currency transactions were reclassified between the individual components of total distributable earnings (loss).

 

 

Amount

 

($000)

Paid-in Capital

Total Distributable Earnings (Loss)

 

Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future.

 

19


 

Capital Value Fund

 

 

 

 

The differences are primarily related to the tax deferral of losses on wash sales and the realization of unrealized gains or losses on certain forward currency contracts. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:

 

 

Amount

 

($000)

Undistributed Ordinary Income

12,869

Undistributed Long-Term Gains

Capital Loss Carryforwards (Non-expiring)*

(4,325)

Net Unrealized Gains (Losses)

50,277

 

*     The fund used capital loss carryforwards of $11,506,000 to offset taxable capital gains realized during the year ended September 30, 2019.

 

As of September 30, 2019, 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

751,986

Gross Unrealized Appreciation

102,049

Gross Unrealized Depreciation

(51,769)

Net Unrealized Appreciation (Depreciation)

50,280

 

 

F.   During the year ended September 30, 2019, the fund purchased $359,505,000 of investment securities and sold $412,819,000 of investment securities, other than temporary cash investments.

 

G.   Capital shares issued and redeemed were:

 

 

Year Ended September 30,

 

2019

2018

 

Shares

Shares

 

(000)

(000)

Issued

5,738

4,316

Issued in Lieu of Cash Distributions

1,520

1,227

Redeemed

(11,130)

(11,915)

Net Increase (Decrease) in Shares Outstanding

(3,872)

(6,372)

 

 

H.   Management has determined that no events or transactions occurred subsequent to September 30, 2019, that would require recognition or disclosure in these financial statements.

 

20


 

Report of Independent Registered Public Accounting Firm

 

To the Board of Trustees of Vanguard 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, 2019, the related statement of operations for the year ended September 30, 2019, the statement of changes in net assets for each of the two years in the period ended September 30, 2019, including the related notes, and the financial highlights for each of the five years in the period ended September 30, 2019 (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, 2019, 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, 2019 and the financial highlights for each of the five years in the period ended September 30, 2019 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, 2019 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 19, 2019

 

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

 

21


 

 

Special 2019 tax information (unaudited) for Vanguard Capital Value Fund

 

This information for the fiscal year ended September 30, 2019, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $18,899,000 of qualified dividend income to shareholders during the fiscal year.

 

For corporate shareholders, 77.9% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

 

22


 

The People Who Govern Your Fund

 

 

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them.

 

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 212 Vanguard funds.

 

Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

 

 

Interested Trustee1

 

Mortimer J. Buckley

 

Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2019–present) of Vanguard and of each of the investment companies served by Vanguard; 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) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; trustee (2018–present) of The Shipley School.

 

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. 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.

 

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), and the Lumina Foundation.

 

1   Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.

 


 

Director of the V Foundation and Oxfam America. 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) 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). Board of advisors and investment committee member of the Museum of Fine Arts Boston. Board member (2018–present) of RIT Capital Partners (investment firm); investment committee member of Partners Health Care System.

 

Sarah Bloom Raskin

 

Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubinstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College.

 

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).

 

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.

 

John E. Schadl

 

Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (May 2019–present) of Vanguard Marketing Corporation.

 

 

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

 


 

 

 

 

 

 

 

 

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 Morningstar, Inc., unless otherwise noted.

 

You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.

 

You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.

 

Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2019, Bloomberg. All rights reserved.

 

CFA® is a registered trademark owned by CFA Institute.

 

 

 

 

 

 

 

 

© 2019 The Vanguard Group, Inc.

 

All rights reserved.

 

Vanguard Marketing Corporation, Distributor.

 

 

 

Q3280 112019

 


 

 

 

 

Annual Report  | September 30, 2019

 

 

 

Vanguard Short-Term Inflation-Protected Securities Index Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.

 

 

 


 

Important information about access to shareholder reports

 

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

 

If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.

 

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

 

 

 

Contents

 

 

 

A Note From Our Chairman

 

1

Your Fund’s Performance at a Glance

 

2

About Your Fund’s Expenses

 

3

Performance Summary

 

5

Financial Statements

8

 

 

 

 

 

 

 

 

 

 

 

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.

 


 

A Note From Our Chairman

 

 

 

 

 

Tim Buckley

 

Chairman and Chief Executive Officer

 

 

 

Dear Shareholder,

 

Recent volatility in financial markets—affecting stocks, bonds, and commodities—has been a good reminder of the wise old adage, “Never keep all your eggs in one basket.” Maintaining balance and diversification in your investment portfolio can help to both limit risk and set you up for long-term success.

 

It’s understandable why some investors might become complacent after a long market run-up like the one that lifted stock prices, especially U.S. stock prices, in the years following the global financial crisis. But failing to rebalance regularly can leave a portfolio with a much different mix of assets than intended and, often, more risk than intended.

 

Balance across and diversification within asset classes are powerful tools for managing risk and achieving your investment goals. A portfolio’s allocation will determine a large portion of its long-term return and also the majority of its volatility risk. A well-diversified portfolio is less vulnerable to significant swings in the performance of any one segment of the asset classes in which it invests.

 

Balance and diversification will never eliminate the risk of loss, nor will they guarantee positive returns in a declining market. But they should reduce the chance that you’ll suffer disproportionate losses in one particular high-flying asset class or sector when it comes back to earth. And exposure to all key market components should give you at least some participation in the sectors that are performing best at any given time.

 

Vanguard is committed to helping you achieve balance and diversification in your portfolios to help meet your investment goals. We thank you for your continued loyalty.

 

Sincerely,

 

 

Mortimer J. Buckley

Chairman and Chief Executive Officer

October 14, 2019

 

1