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: 811-02968-99
Name of Registrant: | Vanguard Trustees’ Equity Fund |
Address of Registrant: | P.O. Box 2600 |
Valley Forge, PA 19482 |
Name and address of agent for service: | Heidi Stam, Esquire |
P.O. Box 876 | |
Valley Forge, PA 19482 |
Registrant’s telephone number, including area code: (610) 669-1000
Date of fiscal year end: October 31
Date of reporting period: November 1, 2015 – April 30, 2016
Item 1: Reports to Shareholders
Semiannual Report | April 30, 2016
Vanguard International Value Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisors’ Report. | 8 |
Fund Profile. | 13 |
Performance Summary. | 15 |
Financial Statements. | 16 |
About Your Fund’s Expenses. | 31 |
Trustees Approve Advisory Arrangements. | 33 |
Glossary. | 35 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows us to help millions of clients around the world reach their financial goals.
Your Fund’s Total Returns
Six Months Ended April 30, 2016 | |
Total | |
Returns | |
Vanguard International Value Fund | -2.48% |
MSCI All Country World Index ex USA | -1.75 |
International Funds Average | -2.59 |
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Your Fund’s Performance at a Glance | ||||
October 31, 2015, Through April 30, 2016 | ||||
Distributions Per Share | ||||
Starting | Ending | Income | Capital | |
Share Price | Share Price | Dividends | Gains | |
Vanguard International Value Fund | $33.22 | $31.71 | $0.662 | $0.000 |
1
Chairman’s Letter
Dear Shareholder,
International stocks lost ground over the six months ended April 30, 2016, as investors’ concerns persisted that slow growth in China and historically low oil prices would affect economies globally. A significant market comeback in March and April wasn’t enough to overcome four straight months of setbacks.
Vanguard International Value Fund didn’t quite keep pace with the broader international market. The fund returned –2.48%, trailing the –1.75% return of its benchmark, the MSCI All Country World Index ex USA, but finishing a touch ahead of the average return of its international fund peers.
The advisors’ holdings in the developed markets of Europe and the Pacific region hurt results, while their emerging markets stocks helped. In terms of sectors, the advisors’ success in telecommunication services couldn’t offset disappointments in financials, health care, and information technology.
In a reversal from recent periods, currency effects bolstered international markets. Most notably, the dollar’s weakness against the Japanese yen and the euro lifted returns for U.S.-based investors.
U.S. stocks traveled a rocky road, finishing the period about even
The broad U.S. stock market delivered flat returns for a half year marked by inconsistency, sharp declines, and even sharper rallies.
2
After struggling during the first four months of the period, U.S. stocks rebounded. Most of the surge came in March as investors cheered the Federal Reserve’s indication that it would raise interest rates fewer times in 2016 than originally anticipated. Continued aggressive stimulus by central banks in Europe and Asia and a recovery in oil prices also helped.
International stocks traced an even rockier path than their U.S. counterparts en route to modestly negative returns. Developed markets, especially in Europe, notched weak results, while emerging markets slightly advanced.
Bonds proved attractive with help from the Fed
The broad U.S. bond market returned 2.82% for the half year. After retreating in November and December, the bond market recorded positive results for each of the next four months. It also received a boost from the Fed’s cautious approach to raising short-term rates.
The yield of the 10-year U.S. Treasury note closed at 1.83% at the end of April, down from 2.17% six months earlier. (Bond prices and yields move in opposite directions.)
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2016 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 0.22% | 0.34% | 10.81% |
Russell 2000 Index (Small-caps) | -1.90 | -5.94 | 6.98 |
Russell 3000 Index (Broad U.S. market) | 0.06 | -0.18 | 10.50 |
FTSE All-World ex US Index (International) | -1.52 | -10.65 | 0.25 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 2.82% | 2.72% | 3.60% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 3.55 | 5.29 | 5.37 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.08 | 0.10 | 0.05 |
CPI | |||
Consumer Price Index | 0.60% | 1.13% | 1.25% |
3
Even though the Fed raised short-term rates a quarter percentage point in December, the target rate of 0.25%–0.5% is still historically low, restraining returns for money market funds and savings accounts.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 8.72%, boosted by favorable currency effects. Even without this currency benefit, international bond returns were solid.
Its long-term record is solid, but the fund has had recent challenges
The International Value Fund’s advisors––Lazard Asset Management, Edinburgh Partners, and ARGA Investment Management––create and maintain a portfolio that often diverges in makeup and performance from the benchmark they’re trying to beat. Although the advisors’ approaches to value investing differ, all three seek to identify undervalued companies with the potential to ultimately deliver strong results.
Periods of short-term pain are sometimes a prerequisite when striving to boost longer-term performance. Patience, of course, is a necessary part of value investing, as the path from potential to actual can take time and involves challenges and obstacles. In their efforts to avoid missteps, your fund’s advisors conduct elaborate research and apply careful screening methods to filter out companies that don’t meet their criteria.
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
International Value Fund | 0.46% | 1.37% |
The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2016, the fund’s annualized expense ratio was 0.45%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015. | ||
Peer group: International Funds. |
4
Do U.S.-based multinationals provide enough global diversification? |
Some investors believe that their portfolios get enough exposure to international stocks |
through their holdings in large-capitalization, multinational U.S. companies such as the ones |
represented in the Standard & Poor’s 500 Index. After all, those firms generated almost half |
of their total sales outside the United States in 2014.* |
However, international exposure based only on a broad index of U.S.-based companies would |
be patchy at best. The near-even split of domestic and foreign sales for S&P 500 companies |
is an average; when you look at individual sectors, a different picture emerges. Information |
technology firms earned the highest percentage of sales abroad (almost 60% in 2014). Utilities |
and telecommunication services, which tend to operate regionally or nationally, generated the |
least overseas revenue. |
As the chart below shows, such a portfolio would also differ significantly from a broadly |
diversified global portfolio in some sector weightings. It would, for example, have more |
exposure to IT and health care stocks and considerably less to materials and financials. |
The bottom line: Large-cap U.S. stocks can give you a degree of exposure to international |
economic and market forces, but not to the same extent as a combination of both U.S. and |
non-U.S. stocks. |
S&P 500 Index sector weightings vary from those of global stocks |
* All S&P 500 Index and sector revenue data are from S&P Dow Jones Indices LLC for 2014. |
There are additional risks when investing outside the United States, including the possibility that returns will be hurt |
by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region. |
Over a challenging six months for international stocks, the fund had disappointing results. International Value’s holdings in Europe, which made up about half the portfolio, returned about –5% and slightly trailed those of the benchmark. Financial companies from the United Kingdom and Swiss financial and health care companies were among the notable detractors as Europe’s negative interest rates and the uncertain investment outlook weighed on returns. More impressive showings came from Dutch and British media companies in the consumer discretionary sector.
The fund also produced mixed but overall negative results in the developed markets of the Pacific region, which returned about –3%. Outcomes in Japan ranged from impressive in telecommunications services to subpar in financials. (Japan and the United Kingdom constitute the two largest country allocations in the fund.)
Results in emerging markets offset some of the weakness. The fund’s emerging-market stocks returned nearly 7%, compared with about 1% for those in the benchmark. Strong performers included Chinese technology stocks; Indonesian telecommunications services companies; Brazilian utilities; and Russian energy, financials, and telecom firms. China remains a trouble spot, and the advisors avoided its slumping financial sector.
You can find more information on the fund’s positioning and performance in the Advisors’ Report that follows this letter.
Whether it’s index or active, low costs and talent matter
If you listen to some investing pundits, you might think index investing and actively managed investing are incompatible opposites. We at Vanguard don’t see it that way.
To us, it’s not index versus active. In fact, depending on your goals, it could well be index and active.
Vanguard is a pioneer in index investing. In 1976, we opened the first index mutual fund, giving shareholders an opportunity to track the performance of the S&P 500 Index. But our roots in active management—which aims to choose investments that will outperform the market—go back to the 1929 launch of what became Vanguard Wellington™ Fund.
Our index and active funds share important traits. Both are low cost, and as their assets grow, we can take advantage of the economies of scale by further reducing fund expense ratios. That allows you to keep more of your fund’s returns.
And low costs aren’t the whole story. Talent and experience are vital regardless of a fund’s management style.
When it comes to indexing, portfolio managers in our Equity Index Group and Fixed Income Group have honed their expertise over decades. That expertise helps our index funds meet their objectives of closely tracking their benchmarks.
Our active funds, too, benefit from world-class managers—both our own experts and premier money managers we hire around the globe. There’s no guarantee that active management will lead to market-beating results, but the combination of talent and low costs can give investors a better chance of success.
If you’d like to know more, see Keys to Improving the Odds of Active Management Success and The Case for Index-Fund Investing, available at vanguard.com/research.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 13, 2016
Advisors’ Report
For the six months ended April 30, 2016, Vanguard International Value Fund returned –2.48%. Your fund is managed by three independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The table below presents the advisors, the percentage and amount of fund assets that each manages, and brief descriptions of their investment strategies. Each advisor has also prepared a discussion of the investment environment during the fiscal period and of how the portfolio’s positioning reflects this assessment. These reports were prepared on May 19, 2016.
Vanguard International Value Fund Investment Advisors | ||||
Fund Assets Managed | ||||
Investment Advisor | % | $ Million | Investment Strategy | |
Lazard Asset Management LLC | 39 | 3,078 | The advisor uses a research-driven, bottom-up, | |
relative-value approach in selecting stocks. The goal is | ||||
to identify individual stocks that offer an appropriate | ||||
trade-off between low relative valuation and high | ||||
financial productivity. | ||||
Edinburgh Partners Limited | 32 | 2,526 | The advisor employs a concentrated, low-turnover, | |
value-oriented investment approach that results in a | ||||
portfolio of companies with good long-term prospects | ||||
and below-market price/earnings ratios. In-depth | ||||
fundamental research on industries and companies is | ||||
central to this investment process. | ||||
ARGA Investment Management, | 25 | 1,990 | The advisor believes that investors overreact to | |
LP | short-term developments, leading to opportunities to | |||
generate gains from investing in “good businesses at | ||||
great prices.” Its valuation-focused process uses a | ||||
dividend discount model to select stocks that trade at a | ||||
discount to intrinsic value based on the company’s | ||||
long-term earnings power and dividend-paying | ||||
capability. | ||||
Cash Investments | 4 | 229 | These short-term reserves are invested by Vanguard in | |
equity index products to simulate investments in | ||||
stocks. Each advisor may also maintain a modest cash | ||||
position. |
8
Lazard Asset Management LLC
Portfolio Managers:
Michael G. Fry,
Managing Director
Michael A. Bennett, CPA,
Managing Director
International equities declined during the period, which was punctuated by volatility. However, economic data in the latter part of the half year improved sentiment and market returns.
With another round of stimulus measures from China, “noise” around cuts in oil production, and some better short-term U.S. industrial data, initially weak commodities rebounded in the later months. Commodity-related stocks in energy, materials, and industrials also rebounded. Previously lagging emerging markets have outperformed so far in 2016.
The U.S. dollar weakened as investors started to question the likely speed and extent of further U.S. interest rate increases. The Bank of Japan’s January decision to follow the European Central Bank in moving to negative interest rates perplexed many investors and may have led to some unintended consequences: The Japanese yen strengthened amid risk aversion, and banks fell sharply because of fears that profit margins would be eroded, not just in Japan but also in most developed markets.
Health care companies declined amid political noise about high drug prices, while traditionally defensive sectors such as utilities, telecommunication services, and consumer staples held up in the weak market.
In telecom, shares of Indonesian mobile phone operator Telekomunikasi rose as net income increased 20% in the past year and the dividend grew. Japanese mobile telecom company KDDI advanced as investors expect higher revenues and lower promotional costs.
In the consumer sectors, Dutch business information-services provider Wolters Kluwer performed well given accelerating growth, while British competitor Informa rose amid strong earnings and a commitment to increase its dividend. Shares of Japan Tobacco surged as the Ministry of Finance approved a price increase for Mevius, its main domestic cigarette brand.
Stock selection in emerging markets benefited the portfolio as BB Seguridade, SABESP, Taiwan Semiconductor, and KOC Holding all rebounded.
In contrast, stock selection in health care detracted from relative returns. Shares of Swiss pharmaceutical company Novartis declined as revenue decreased in its eye-care unit, Alcon, and British pharmaceutical company Shire slid as investors didn’t welcome its acquisition
9
of Baxalta. Overall weakness in health care pressured the portfolio’s holdings in the sector, driven in part by rising political concerns involving U.S. drug pricing.
Low exposure to, and selection in, energy also detracted as shares of Canadian exploration and production company Encana (which was sold during the period) declined as the price of oil fell. Low exposure to the strongly performing materials sector also hurt relative returns.
Recent recoveries in commodity prices and the weakening of the U.S. dollar are providing some relief to beleaguered credit markets and to many emerging-market countries. However, growth remains challenged in developed markets and fragile in emerging markets, while credit has grown to worrisome proportions.
Consumers broadly look better positioned in developed markets, and there are a few signs of labor tightness in the United States and Japan. Many areas in technology and health care remain strong. Generally, corporates are healthy, but profit forecasts, and in some cases margins, are under pressure in some areas. Credit is also showing signs of deterioration, raising the cost of capital. Many share prices still appear dependent on both some level of economic recovery and a continuation of low interest rates. This is dangerous, as over the medium term, that is an unlikely combination.
The portfolio teams continue to focus on selection, seeking stocks with sustainably high or improving returns trading at attractive valuations. We remain confident that the portfolio’s track record will persist in a variety of market conditions.
Edinburgh Partners Limited
Portfolio Manager:
Sandy Nairn, Director and CEO
Markets were particularly volatile over the six months as investor sentiment waxed and waned. In the early part of 2016, principal concerns involved monetary policy in Europe and Japan.
To encourage increased bank lending, the European and Japanese central banks independently continued down the road of negative interest rates. Although the direct effect on bank profitability was not hugely significant, the psychological effect was substantial, triggering market worries about the financial sector specifically and growth prospects generally. In our view, both reactions were overstated. Underlying economic growth will continue at a pedestrian pace, and incomes will gradually begin to pick up. As a consequence, we see potential for a rapid recovery in financial share prices when sentiment reverses.
10
Outside the financial sector, the most interesting movements have been in energy. The excess of supply is not enormous, and in the medium term it is likely to be absorbed by economic growth. With industry cash-flow breakeven exceeding $50 per barrel, we can expect energy prices to continue to creep up. Opportunities emerged over the six months, and as a result the portfolio has added TOTAL and increased its BP holding.
Share price performance in health care has been lackluster in recent years, and consequently valuations have continued to improve. With strong balance sheets, moderate growth, and sustainable dividend yields, the major pharmaceutical companies look to be good value, notwithstanding some concerns generated by the U.S. political process.
Asian emerging markets may provide additional investment opportunities as concerns about China’s growth begin to abate. The portfolio has exposure, but more holdings are likely to be added as valuations permit.
We are comfortable with the portfolio structure and its exposure to financials, health care, and energy. As noted, we anticipate that exposure to Asian emerging markets may increase. However, equity markets as a whole remain relatively fully priced, and we believe it is important to be particularly disciplined about valuation. This means there may be periods when cash levels creep higher while we wait for appropriate entry points.
ARGA Investment Management, LP
Portfolio Managers: A. Rama Krishna, CFA,
Founder and Chief Investment Officer Steven Morrow, CFA, Director of Research
International equity markets were volatile during the six months, finishing modestly lower. A sharp correction in the period’s first half was followed by an almost equally strong recovery in the second, driven by dovish Federal Reserve commentary, stabilizing earnings expectations, and rebounding commodity prices.
ARGA seeks to maximize returns by investing in companies that trade at discounts to their intrinsic values. These discounted valuations typically stem from macroeconomic, regulatory, industry, or company-specific stress. Investors often overreact to such stress, allowing us to purchase companies with strong franchises at low valuations––then profit when those valuations recover.
ARGA’s investment activity in the energy sector highlights this approach. As oil prices plummeted in 2015, energy company earnings, returns, and stock prices collapsed. Our valuation models suggested that the market was pricing in very impaired industry returns long-term. Our analysis of more than 100 years of industry data showed that energy returns always normalized after price plunges, even when oil prices failed to recover. Such normalization is driven by aggressive
11
action by energy companies to cut costs, pursue efficiencies, consolidate, and become more capital-disciplined, signifying a focus on returns over growth. Our research confirms that in the recent downturn, companies have begun this process through substantial capital expenditure cuts and restructuring.
Building return normalization into our valuation models led to intrinsic value estimates for select energy companies far above then-current market prices, implying significant investment opportunity. So as energy stocks collapsed in late 2015 and early 2016, we added to our already elevated energy exposure, focusing on companies capable of weathering even a prolonged downturn.
Disciplined adherence to this approach has begun to show results. Over the period, our energy exposure boosted portfolio performance. As energy valuations still have a ways to recover, consumer discretionary and emerging-market holdings made the largest contribution.
Also demonstrating our valuation approach is a significant new position in the Japanese telecom sector. Noting that the value of its listed investment holdings exceeded the company’s market capitalization, we were able to purchase this strongly cash-generative business at a significant discount.
Our portfolio of attractively valued international companies offers strong future returns as valuations recover.
12
International Value Fund
Fund Profile
As of April 30, 2016
Portfolio Characteristics | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Number of Stocks | 154 | 1,847 |
Median Market Cap | $30.3B | $28.4B |
Price/Earnings Ratio | 20.2x | 18.6x |
Price/Book Ratio | 1.4x | 1.5x |
Return on Equity | 13.3% | 15.0% |
Earnings Growth | ||
Rate | 8.8% | 7.4% |
Dividend Yield | 3.0% | 3.2% |
Turnover Rate | ||
(Annualized) | 25% | — |
Ticker Symbol | VTRIX | — |
Expense Ratio1 | 0.46% | — |
Short-Term Reserves | 1.8% | — |
Sector Diversification (% of equity exposure) | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Consumer Discretionary | 15.3% | 11.6% |
Consumer Staples | 9.5 | 11.0 |
Energy | 10.9 | 6.7 |
Financials | 20.9 | 25.9 |
Health Care | 9.2 | 9.0 |
Industrials | 10.9 | 11.5 |
Information Technology | 8.9 | 8.0 |
Materials | 4.2 | 7.4 |
Telecommunication Services | 7.7 | 5.3 |
Utilities | 2.5 | 3.6 |
Volatility Measures | |
MSCI AC | |
World Index | |
ex USA | |
R-Squared | 0.96 |
Beta | 1.01 |
These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | |
Ten Largest Holdings (% of total net assets) | ||
Novartis AG | Pharmaceuticals | 2.2% |
Royal Dutch Shell plc | Integrated Oil & Gas | 2.0 |
KDDI Corp. | Wireless | |
Telecommunication | ||
Services | 1.9 | |
Japan Tobacco Inc. | Tobacco | 1.9 |
BP plc | Integrated Oil & Gas | 1.8 |
TOTAL SA | Integrated Oil & Gas | 1.7 |
BHP Billiton | Diversified Metals & | |
Mining | 1.5 | |
SoftBank Group Corp. | Wireless | |
Telecommunication | ||
Services | 1.5 | |
Samsung Electronics Co. | Technology | |
Ltd. | Hardware, Storage & | |
Peripherals | 1.5 | |
Sumitomo Mitsui | ||
Financial Group Inc. | Diversified Banks | 1.4 |
Top Ten | 17.4% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
Allocation by Region (% of equity exposure)
1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the six
months ended April 30, 2016, the annualized expense ratio was 0.45%.
13
International Value Fund
Market Diversification (% of equity exposure) | ||
MSCI AC | ||
World | ||
Index | ||
Fund | ex USA | |
Europe | ||
United Kingdom | 22.9% | 13.9% |
Germany | 6.5 | 6.5 |
Switzerland | 6.2 | 6.4 |
France | 5.4 | 7.1 |
Belgium | 1.6 | 1.0 |
Spain | 1.5 | 2.3 |
Netherlands | 1.4 | 2.1 |
Finland | 1.4 | 0.7 |
Sweden | 1.3 | 2.1 |
Denmark | 1.1 | 1.4 |
Other | 1.3 | 2.7 |
Subtotal | 50.6% | 46.2% |
Pacific | ||
Japan | 22.0% | 16.5% |
South Korea | 4.1 | 3.3 |
Hong Kong | 3.7 | 2.3 |
Australia | 1.4 | 5.2 |
Singapore | 1.2 | 0.9 |
Other | 0.0 | 0.1 |
Subtotal | 32.4% | 28.3% |
Emerging Markets | ||
Brazil | 2.1% | 1.6% |
China | 2.1 | 5.1 |
Turkey | 1.5 | 0.3 |
Russia | 1.5 | 0.9 |
Taiwan | 1.4 | 2.5 |
Thailand | 1.2 | 0.5 |
Other | 2.4 | 7.0 |
Subtotal | 12.2% | 17.9% |
North America | ||
United States | 2.3% | 0.0% |
Canada | 1.4 | 6.9 |
Subtotal | 3.7% | 6.9% |
Middle East | ||
Israel | 1.1% | 0.5% |
Other | 0.0% | 0.2% |
14
International 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.
Average Annual Total Returns: Periods Ended March 31, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.
Inception | One | Five | Ten | |
Date | Year | Years | Years | |
International Value Fund | 5/16/1983 | -10.66% | 1.34% | 1.64% |
See Financial Highlights for dividend and capital gains information.
15
International Value Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2016
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks (95.4%)1 | |||
Australia (1.0%) | |||
BHP Billiton Ltd. | 3,051,205 | 47,650 | |
Woodside Petroleum Ltd. | 1,462,441 | 31,311 | |
* | South32 Ltd. | 14,073 | 18 |
78,979 | |||
Belgium (1.5%) | |||
Anheuser-Busch InBev SA | 769,275 | 95,432 | |
KBC Groep NV | 414,579 | 23,325 | |
118,757 | |||
Brazil (2.1%) | |||
BB Seguridade | |||
Participacoes SA | 7,200,100 | 62,805 | |
Cia de Saneamento | |||
Basico do Estado de | |||
Sao Paulo | 4,022,500 | 30,877 | |
Ambev SA | 4,998,600 | 28,181 | |
* | Petroleo Brasileiro SA | ||
ADR | 4,349,900 | 25,665 | |
Estacio Participacoes SA | 3,857,000 | 13,312 | |
160,840 | |||
Canada (1.3%) | |||
Canadian Natural | |||
Resources Ltd. | 2,087,100 | 62,678 | |
Potash Corp. of | |||
Saskatchewan Inc. | 2,224,300 | 39,355 | |
102,033 | |||
China (2.0%) | |||
* | Baidu Inc. ADR | 291,060 | 56,553 |
China Shenhua Energy | |||
Co. Ltd. | 28,319,500 | 47,686 | |
Lenovo Group Ltd. | 50,174,000 | 39,692 | |
* | Autohome Inc. ADR | 488,936 | 14,453 |
158,384 | |||
Denmark (1.1%) | |||
Novo Nordisk A/S Class B | 881,069 | 49,194 | |
Carlsberg A/S Class B | 341,614 | 33,301 | |
82,495 |
Market | |||
Value• | |||
Shares | ($000) | ||
Finland (1.3%) | |||
Nokia Oyj | 10,546,558 | 62,262 | |
Sampo Oyj Class A | 983,154 | 43,004 | |
105,266 | |||
France (5.0%) | |||
TOTAL SA | 2,600,476 | 131,431 | |
BNP Paribas SA | 1,219,150 | 64,565 | |
Valeo SA | 275,785 | 43,745 | |
^ | Vinci SA | 545,329 | 40,730 |
^ | ArcelorMittal | 6,457,900 | 36,456 |
^ | Vallourec SA | 6,937,210 | 36,126 |
^ | Vivendi SA | 968,820 | 18,611 |
^ | Engie SA | 965,914 | 15,931 |
387,595 | |||
Germany (6.0%) | |||
Bayer AG | 839,848 | 97,059 | |
Siemens AG | 646,507 | 67,656 | |
E.ON SE | 6,285,881 | 65,148 | |
Muenchener | |||
Rueckversicherungs- | |||
Gesellschaft AG in | |||
Muenchen | 315,465 | 58,647 | |
Commerzbank AG | 5,521,923 | 51,781 | |
Fresenius Medical Care | |||
AG & Co. KGaA | 554,914 | 48,299 | |
* | RWE AG | 1,672,495 | 25,059 |
Continental AG | 112,095 | 24,685 | |
GEA Group AG | 519,179 | 24,126 | |
METRO AG | 246,657 | 7,869 | |
470,329 | |||
Hong Kong (3.6%) | |||
Swire Pacific Ltd. | |||
Class A | 6,451,850 | 69,994 | |
Galaxy Entertainment | |||
Group Ltd. | 18,827,000 | 63,282 | |
CK Hutchison Holdings | |||
Ltd. | 5,040,692 | 60,305 | |
Melco Crown | |||
Entertainment Ltd. ADR | 2,370,800 | 35,088 |
16
International Value Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Li & Fung Ltd. | 38,162,000 | 23,601 | |
Sands China Ltd. | 4,822,800 | 17,182 | |
* | Esprit Holdings Ltd. | 9,909,234 | 8,669 |
* | Global Brands Group | ||
Holding Ltd. | 7,314,000 | 865 | |
278,986 | |||
India (0.5%) | |||
HCL Technologies Ltd. | 3,526,756 | 39,815 | |
Indonesia (0.7%) | |||
* | Telekomunikasi Indonesia | ||
Persero Tbk PT ADR | 997,469 | 53,235 | |
Ireland (0.3%) | |||
Ryanair Holdings plc ADR | 309,984 | 25,093 | |
Israel (1.1%) | |||
Teva Pharmaceutical | |||
Industries Ltd. ADR | 821,045 | 44,706 | |
* | Check Point Software | ||
Technologies Ltd. | 517,100 | 42,852 | |
87,558 | |||
Italy (0.3%) | |||
^ | Banca Mediolanum SPA | 2,972,415 | 24,510 |
Japan (20.8%) | |||
KDDI Corp. | 5,285,800 | 152,261 | |
Japan Tobacco Inc. | 3,662,600 | 149,646 | |
SoftBank Group Corp. | 2,182,300 | 117,343 | |
Sumitomo Mitsui | |||
Financial Group Inc. | 3,640,900 | 109,561 | |
Nippon Telegraph & | |||
Telephone Corp. | 2,141,800 | 95,846 | |
East Japan Railway Co. | 941,200 | 82,803 | |
Daiwa House Industry | |||
Co. Ltd. | 2,960,600 | 79,098 | |
Panasonic Corp. | 8,435,300 | 75,227 | |
Daihatsu Motor Co. Ltd. | 5,405,600 | 72,138 | |
Omron Corp. | 2,189,200 | 69,478 | |
Sumitomo Mitsui Trust | |||
Holdings Inc. | 21,188,000 | 65,129 | |
Toyota Motor Corp. | 1,254,900 | 63,611 | |
Mitsubishi Corp. | 3,537,200 | 59,455 | |
Makita Corp. | 846,700 | 53,413 | |
Sumitomo Electric | |||
Industries Ltd. | 4,439,000 | 53,400 | |
Nomura Holdings Inc. | 12,169,400 | 51,705 | |
DeNA Co. Ltd. | 2,963,900 | 49,881 | |
Takashimaya Co. Ltd. | 6,314,000 | 46,097 | |
Seven & i Holdings Co. | |||
Ltd. | 954,783 | 38,958 | |
Ryohin Keikaku Co. Ltd. | 141,200 | 31,454 | |
Sony Corp. | 1,239,700 | 30,028 | |
FANUC Corp. | 187,800 | 27,742 |
Market | |||
Value• | |||
Shares | ($000) | ||
Honda Motor Co. Ltd. | 827,700 | 22,336 | |
Sumitomo Corp. | 1,655,800 | 17,506 | |
Yamato Kogyo Co. Ltd. | 701,000 | 16,456 | |
1,630,572 | |||
Netherlands (1.3%) | |||
Unilever NV | 1,239,351 | 53,986 | |
^ | Wolters Kluwer NV | 1,220,288 | 46,484 |
100,470 | |||
Norway (0.6%) | |||
Telenor ASA | 1,704,543 | 29,329 | |
^ | TGS Nopec Geophysical | ||
Co. ASA | 935,448 | 15,606 | |
44,935 | |||
Other (0.4%) | |||
2 | Vanguard FTSE All-World | ||
ex-US ETF | 718,406 | 31,653 | |
Philippines (0.3%) | |||
Alliance Global | |||
Group Inc. | 72,775,600 | 22,469 | |
Russia (1.5%) | |||
Gazprom PAO ADR | |||
(London Shares) | 9,420,057 | 48,947 | |
Sberbank of Russia PJSC | |||
ADR | 3,063,163 | 24,628 | |
Lukoil PJSC ADR | 466,261 | 19,866 | |
Mobile TeleSystems | |||
PJSC ADR | 1,743,447 | 16,144 | |
Gazprom PAO ADR | 740,167 | 3,842 | |
113,427 | |||
Singapore (1.1%) | |||
DBS Group Holdings Ltd. | 4,684,000 | 52,981 | |
Genting Singapore plc | 58,872,000 | 35,536 | |
88,517 | |||
South Africa (0.9%) | |||
^ | Sanlam Ltd. | 7,414,619 | 36,008 |
Mr Price Group Ltd. | 1,366,036 | 17,366 | |
Nampak Ltd. | 9,750,690 | 16,678 | |
70,052 | |||
South Korea (4.0%) | |||
Samsung Electronics Co. | |||
Ltd. | 104,786 | 114,199 | |
E-MART Inc. | 380,476 | 61,113 | |
SK Hynix Inc. | 1,863,063 | 45,697 | |
Hyundai Mobis Co. Ltd. | 149,268 | 34,019 | |
Shinhan Financial Group | |||
Co. Ltd. | 561,096 | 20,573 | |
Hana Financial Group Inc. | 891,981 | 20,002 | |
Hyundai Home Shopping | |||
Network Corp. | 141,604 | 16,579 | |
312,182 |
17
International Value Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Spain (1.4%) | |||
Banco Santander SA | 12,988,665 | 65,961 | |
Red Electrica Corp. SA | 472,021 | 42,215 | |
108,176 | |||
Sweden (1.3%) | |||
^ | Assa Abloy AB Class B | 3,057,883 | 64,253 |
Swedbank AB Class A | 1,671,348 | 36,082 | |
100,335 | |||
Switzerland (6.0%) | |||
Novartis AG | 2,247,102 | 171,009 | |
Roche Holding AG | 234,346 | 59,292 | |
Actelion Ltd. | 361,949 | 58,665 | |
ABB Ltd. | 2,756,144 | 58,348 | |
Credit Suisse Group AG | 3,376,710 | 51,388 | |
* | LafargeHolcim Ltd. | 884,062 | 44,889 |
Cie Financiere Richemont | |||
SA | 319,810 | 21,325 | |
GAM Holding AG | 577,710 | 7,548 | |
472,464 | |||
Taiwan (1.3%) | |||
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | 22,463,704 | 103,207 | |
Thailand (1.2%) | |||
Bangkok Bank PCL | 13,166,800 | 61,710 | |
Kasikornbank PCL | |||
(Foreign) | 6,073,300 | 28,968 | |
90,678 | |||
Turkey (1.5%) | |||
* | Turkcell Iletisim | ||
Hizmetleri AS | 10,316,980 | 44,646 | |
KOC Holding AS | 7,732,365 | 40,401 | |
Turkiye Halk Bankasi AS | 8,563,897 | 32,889 | |
117,936 | |||
United Kingdom (21.8%) | |||
Royal Dutch Shell plc | |||
Class A (Amsterdam | |||
Shares) | 3,802,694 | 100,460 | |
Carnival plc | 1,779,082 | 88,739 | |
British American | |||
Tobacco plc | 1,358,260 | 82,816 | |
BP plc ADR | 2,196,186 | 73,747 | |
Prudential plc | 3,724,739 | 73,525 | |
BHP Billiton plc | 5,368,213 | 73,354 |
Market | |||
Value• | |||
Shares | ($000) | ||
AstraZeneca plc | 1,227,908 | 70,449 | |
BP plc | 12,540,598 | 69,091 | |
Vodafone Group plc | 19,784,694 | 63,743 | |
* | Tesco plc | 24,017,376 | 60,381 |
Royal Dutch Shell plc | |||
Class A | 1,998,307 | 52,342 | |
Unilever plc | 1,171,119 | 52,328 | |
Lloyds Banking Group | |||
plc | 51,660,286 | 50,705 | |
Rolls-Royce Holdings plc | 5,167,099 | 50,691 | |
Compass Group plc | 2,810,626 | 50,053 | |
* | Royal Bank of Scotland | ||
Group plc | 14,611,000 | 49,157 | |
Shire plc | 776,498 | 48,455 | |
WPP plc | 1,959,585 | 45,781 | |
Wolseley plc | 811,213 | 45,438 | |
RSA Insurance Group plc | 6,671,056 | 44,811 | |
Standard Chartered plc | 5,353,229 | 43,268 | |
Informa plc | 4,506,338 | 43,173 | |
* | Serco Group plc | 29,728,498 | 41,822 |
HSBC Holdings plc | 5,877,471 | 38,949 | |
Mediclinic International | |||
plc | 2,825,842 | 37,389 | |
RELX NV | 2,063,199 | 36,552 | |
London Stock Exchange | |||
Group plc | 854,524 | 33,943 | |
Associated British Foods | |||
plc | 695,823 | 31,215 | |
*,3 | Worldpay Group plc | 7,739,003 | 30,183 |
Barclays plc | 11,772,753 | 29,559 | |
Rexam plc | 3,011,004 | 27,538 | |
Signet Jewelers Ltd. | 202,410 | 23,133 | |
Ashtead Group plc | 1,532,259 | 20,378 | |
Petrofac Ltd. | 1,590,239 | 19,702 | |
1,702,870 | |||
United States (2.2%) | |||
Aon plc | 458,755 | 48,224 | |
* | Michael Kors Holdings Ltd. | 849,100 | 43,865 |
* | Weatherford International | ||
plc | 10,092,000 | 82,048 | |
174,137 | |||
Total Common Stocks | |||
(Cost $7,945,132) | 7,457,955 |
18
International Value Fund
Market | ||
Value• | ||
Shares | ($000) | |
Temporary Cash Investments (6.4%)1 | ||
Money Market Fund (6.2%) | ||
4,5 Vanguard Market | ||
Liquidity Fund, | ||
0.495% | 482,835,671 | 482,836 |
Face | ||
Amount | ||
($000) | ||
U.S. Government and Agency Obligations (0.2%) | ||
6 United States Treasury | ||
Note/Bond, 0.375%, | ||
5/31/16 | 14,954 | 14,954 |
United States Treasury | ||
Note/Bond, 3.250%, | ||
5/31/16 | 4,700 | 4,711 |
19,665 | ||
Total Temporary Cash Investments | ||
(Cost $502,501) | 502,501 | |
Total Investments (101.8%) | ||
(Cost $8,447,647) | 7,960,456 | |
Amount | ||
($000) | ||
Other Assets and Liabilities (-1.8%) | ||
Other Assets | ||
Investment in Vanguard | 637 | |
Receivables for Investment Securities Sold 16,511 | ||
Receivables for Accrued Income | 45,860 | |
Receivables for Capital Shares Issued | 4,747 | |
Other Assets | 42,820 | |
Total Other Assets | 110,575 |
Amount | |
($000) | |
Liabilities | |
Payables for Investment Securities | |
Purchased | (48,518) |
Collateral for Securities on Loan | (162,715) |
Payables to Investment Advisor | (3,740) |
Payables for Capital Shares Redeemed | (10,014) |
Payables to Vanguard | (18,405) |
Other Liabilities | (5,062) |
Total Liabilities | (248,454) |
Net Assets (100%) | |
Applicable to 246,700,995 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 7,822,577 |
Net Asset Value Per Share | $31.71 |
At April 30, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 8,431,865 |
Undistributed Net Investment Income | 45,484 |
Accumulated Net Realized Losses | (175,584) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | (487,191) |
Futures Contracts | 2,074 |
Forward Currency Contracts | 4,721 |
Foreign Currencies | 1,208 |
Net Assets | 7,822,577 |
• 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 $154,140,000.
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 97.9% and 3.9%, respectively, of net assets.
2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
3 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At April 30, 2016, the value of this security represented 0.4% of net assets.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Includes $162,715,000 of collateral received for securities on loan.
6 Securities with a value of $14,000,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
19
International Value Fund
Statement of Operations
Six Months Ended | |
April 30, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 97,216 |
Interest2 | 550 |
Securities Lending | 1,504 |
Total Income | 99,270 |
Expenses | |
Investment Advisory Fees—Note B | |
Base Fee | 6,375 |
Performance Adjustment | 1,394 |
The Vanguard Group—Note C | |
Management and Administrative | 7,972 |
Marketing and Distribution | 548 |
Custodian Fees | 536 |
Shareholders’ Reports | 87 |
Trustees’ Fees and Expenses | 5 |
Total Expenses | 16,917 |
Net Investment Income | 82,353 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | (122,273) |
Futures Contracts | (5,705) |
Foreign Currencies and Forward Currency Contracts | (955) |
Realized Net Gain (Loss) | (128,933) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | (149,263) |
Futures Contracts | (5,332) |
Foreign Currencies and Forward Currency Contracts | 7,892 |
Change in Unrealized Appreciation (Depreciation) | (146,703) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (193,283) |
1 Dividends are net of foreign withholding taxes of $9,780,000. | |
2 Dividend income, interest income, and realized gain (loss) from affiliated companies of the fund were $347,000, $508,000, and $0, respectively. | |
See accompanying Notes, which are an integral part of the Financial Statements.
20
International Value Fund
Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 82,353 | 159,684 |
Realized Net Gain (Loss) | (128,933) | 80,124 |
Change in Unrealized Appreciation (Depreciation) | (146,703) | (855,247) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (193,283) | (615,439) |
Distributions | ||
Net Investment Income | (158,648) | (213,924) |
Realized Capital Gain | — | — |
Total Distributions | (158,648) | (213,924) |
Capital Share Transactions | ||
Issued | 786,988 | 1,241,161 |
Issued in Lieu of Cash Distributions | 150,128 | 201,817 |
Redeemed | (694,204) | (953,508) |
Net Increase (Decrease) from Capital Share Transactions | 242,912 | 489,470 |
Total Increase (Decrease) | (109,019) | (339,893) |
Net Assets | ||
Beginning of Period | 7,931,596 | 8,271,489 |
End of Period1 | 7,822,577 | 7,931,596 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $45,484,000 and $123,930,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
21
International Value Fund
Financial Highlights
Six Months | ||||||
Ended | ||||||
For a Share Outstanding | April 30, | Year Ended October 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $33.22 | $36.87 | $37.12 | $29.78 | $28.98 | $31.92 |
Investment Operations | ||||||
Net Investment Income | . 336 | . 669 | . 9771 | .757 | .804 | .843 |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments | (1.184) | (3.373) | (.530) | 7.402 | .838 | (3.103) |
Total from Investment Operations | (.848) | (2.704) | .447 | 8.159 | 1.642 | (2.260) |
Distributions | ||||||
Dividends from Net Investment Income | (. 662) | (. 946) | (. 697) | (. 819) | (. 842) | (. 680) |
Distributions from Realized Capital Gains | — | — | — | — | — | — |
Total Distributions | (. 662) | (. 946) | (. 697) | (. 819) | (. 842) | (. 680) |
Net Asset Value, End of Period | $31.71 | $33.22 | $36.87 | $37.12 | $29.78 | $28.98 |
Total Return2 | -2.48% | -7.43% | 1.20% | 27.94% | 6.00% | -7.27% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $7,823 | $7,932 | $8,271 | $8,028 | $6,465 | $6,553 |
Ratio of Total Expenses to | ||||||
Average Net Assets3 | 0.45% | 0.46% | 0.44% | 0.43% | 0.40% | 0.39% |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 2.21% | 1.95% | 2.64%1 | 2.24% | 2.77% | 2.59% |
Portfolio Turnover Rate | 25% | 36% | 37% | 52% | 53% | 39% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized. | ||||||
1 Net investment income per share and the ratio of net investment income to average net assets include $.175 and 0.47%, respectively, | ||||||
2 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees. | ||||||
3 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.04%, 0.03%, 0.01%, (0.03%), and (0.05%). |
See accompanying Notes, which are an integral part of the Financial Statements.
22
International Value Fund
Notes to Financial Statements
Vanguard International Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations.
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 acquired over 60 days to maturity 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. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures and Forward Currency 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
23
International Value Fund
futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
The fund enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts or to protect the value of securities and related receivables and payables against changes in 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. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets 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.
Futures contracts are valued at their quoted daily settlement prices. 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 aggregate settlement values and 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 gains (losses) on futures or forward currency contracts.
During the six months ended April 30, 2016, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund’s average investment in forward currency contracts represented 3% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. 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 (October 31, 2012–2015), and for the period ended April 30, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
24
International Value Fund
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled 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 absence 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.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at April 30, 2016, or at any time during the period then ended.
8. 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. The investment advisory firms Lazard Asset Management LLC, Edinburgh Partners Limited, and ARGA Investment Management, LP, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Lazard Asset Management LLC is subject to quarterly adjustments based on performance relative to the MSCI All County World Index ex USA for the preceding five years. The basic fee of Edinburgh Partners Limited is subject to quarterly adjustments based on performance relative to the MSCI All County World Index ex USA for the preceding three years. The basic fee of ARGA Investment Management, LP, is subject to quarterly adjustments based on performance relative to the MSCI All County World Index ex USA since October 31, 2012.
25
International Value Fund
Vanguard manages the cash reserves of the fund as described below.
For the six months ended April 30, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.17% of the fund’s average net assets, before an increase of $1,394,000 (0.04%) 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, 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.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2016, the fund had contributed to Vanguard capital in the amount of $637,000, representing 0.01% of the fund’s net assets and 0.25% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 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).
The following table summarizes the market value of the fund’s investments as of April 30, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 834,376 | 6,600,446 | 23,133 |
Temporary Cash Investments | 482,836 | 19,665 | — |
Futures Contracts—Assets1 | 172 | — | — |
Futures Contracts—Liabilities1 | (2,392) | — | — |
Forward Currency Contracts—Assets | — | 7,391 | — |
Forward Currency Contracts—Liabilities | — | (2,670) | — |
Total | 1,314,992 | 6,624,832 | 23,133 |
1 Represents variation margin on the last day of the reporting period. |
Securities in certain countries may transfer between Level 1 and Level 2 because of differences in stock market closure times that may result from transitions between standard and daylight saving time in those countries and the United States. Based on values on the date of transfer, securities valued at $102,234,000 based on Level 1 inputs were transferred from Level 2 during the fiscal period.
26
International Value Fund
E. At April 30, 2016, the fair values of derivatives were reflected in the Statement of Net Assets as follows:
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Statement of Net Assets Caption | ($000) | ($000) | ($000) |
Other Assets | 172 | 7,391 | 7,563 |
Other Liabilities | (2,392) | (2,670) | (5,062) |
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended April 30, 2016, were: | |||
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) |
Futures Contracts | (5,705) | — | (5,705) |
Forward Currency Contracts | — | 1,196 | 1,196 |
Realized Net Gain (Loss) on Derivatives | (5,705) | 1,196 | (4,509) |
Change in Unrealized Appreciation (Depreciation) on Derivatives | |||
Futures Contracts | (5,332) | — | (5,332) |
Forward Currency Contracts | — | 6,136 | 6,136 |
Change in Unrealized Appreciation (Depreciation) on Derivatives | (5,332) | 6,136 | 804 |
At April 30, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were: | ||||
($000) | ||||
Aggregate | ||||
Number of | Settlement | Unrealized | ||
Long (Short) | Value | Appreciation | ||
Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
Dow Jones EURO STOXX 50 Index | June 2016 | 2,059 | 70,206 | 592 |
Topix Index | June 2016 | 395 | 48,972 | (148) |
FTSE 100 Index | June 2016 | 525 | 47,775 | 775 |
S&P ASX 200 Index | June 2016 | 300 | 29,940 | 855 |
2,074 |
Unrealized appreciation (depreciation) on open DOW Jones EURO STOXX 50 Index and FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.
International Value Fund
At April 30, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
BNP Paribas | 6/14/16 | JPY | 5,565,966 | USD | 49,714 | 2,663 |
Deutsche Bank AG | 6/22/16 | EUR | 33,532 | USD | 37,229 | 1,233 |
Barclays Bank PLC | 6/22/16 | EUR | 28,039 | USD | 31,784 | 377 |
Barclays Bank PLC | 6/14/16 | JPY | 3,261,275 | USD | 29,345 | 1,344 |
Deutsche Bank AG | 6/22/16 | GBP | 20,244 | USD | 29,304 | 280 |
Citibank, N.A. | 6/22/16 | GBP | 14,824 | USD | 21,540 | 125 |
BNP Paribas | 6/22/16 | EUR | 18,224 | USD | 20,802 | 100 |
BNP Paribas | 6/22/16 | GBP | 12,319 | USD | 17,556 | 450 |
Morgan Stanley Capital | 6/21/16 | AUD | 21,165 | USD | 15,665 | 392 |
Goldman Sachs | 6/22/16 | EUR | 12,014 | USD | 13,663 | 118 |
UBS AG | 6/21/16 | AUD | 14,546 | USD | 11,175 | (139) |
JPMorgan Chase Bank | 6/22/16 | GBP | 6,607 | USD | 9,515 | 140 |
Citibank, N.A. | 6/21/16 | AUD | 10,947 | USD | 8,359 | (54) |
Barclays Bank PLC | 6/21/16 | AUD | 5,927 | USD | 4,495 | 1 |
Goldman Sachs | 6/21/16 | AUD | 2,490 | USD | 1,886 | 3 |
BNP Paribas | 6/21/16 | AUD | 2,343 | USD | 1,774 | 4 |
Citibank, N.A. | 6/22/16 | USD | 18,809 | GBP | 13,156 | (417) |
UBS AG | 6/22/16 | USD | 14,054 | EUR | 12,346 | (107) |
Barclays Bank PLC | 6/22/16 | USD | 13,548 | EUR | 11,954 | (164) |
Citibank, N.A. | 6/14/16 | USD | 12,477 | JPY | 1,362,010 | (340) |
Barclays Bank PLC | 6/22/16 | USD | 9,522 | GBP | 6,603 | (128) |
JPMorgan Chase Bank | 6/14/16 | USD | 7,920 | JPY | 889,350 | (449) |
BNP Paribas | 6/22/16 | USD | 5,796 | EUR | 5,103 | (57) |
Goldman Sachs | 6/21/16 | USD | 4,549 | AUD | 5,953 | 33 |
UBS AG | 6/14/16 | USD | 4,124 | JPY | 463,080 | (234) |
BNP Paribas | 6/21/16 | USD | 4,034 | AUD | 5,181 | 103 |
BNP Paribas | 6/14/16 | USD | 3,374 | JPY | 382,060 | (221) |
Morgan Stanley | 6/14/16 | USD | 3,200 | JPY | 357,210 | (162) |
JPMorgan Chase Bank | 6/22/16 | USD | 2,589 | GBP | 1,817 | (67) |
28
International Value Fund
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
UBS AG | 6/21/16 | USD | 2,288 | AUD | 2,996 | 16 |
Barclays Bank PLC | 6/21/16 | USD | 1,759 | AUD | 2,324 | (4) |
Barclays Bank PLC | 6/14/16 | USD | 1,663 | JPY | 188,930 | (115) |
UBS AG | 6/21/16 | USD | 1,241 | AUD | 1,651 | (12) |
Barclays Bank PLC | 6/21/16 | USD | 878 | AUD | 1,145 | 9 |
4,721 | ||||||
AUD—Australian dollar. | ||||||
EUR—Euro. | ||||||
GBP—British pound. | ||||||
JPY—Japanese yen. | ||||||
USD—U.S. dollar. |
At April 30, 2016, the counterparty (counterparties) had deposited in segregated accounts securities with a value of $1,667,000 in connection with amounts due to the fund for open forward currency contracts.
F. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2016, the fund realized net foreign currency losses of $2,151,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2015, the fund had available capital losses totaling $50,118,000 to offset future net capital gains through October 31, 2017. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2016; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2016, the cost of investment securities for tax purposes was $8,447,647,000. Net unrealized depreciation of investment securities for tax purposes was $487,191,000, consisting of unrealized gains of $821,217,000 on securities that had risen in value since their purchase and $1,308,408,000 in unrealized losses on securities that had fallen in value since their purchase.
G. During the six months ended April 30, 2016, the fund purchased $962,665,000 of investment securities and sold $909,507,000 of investment securities, other than temporary cash investments.
29
International Value Fund
H. Capital shares issued and redeemed were: | ||
Six Months Ended | Year Ended | |
April 30, 2016 | October 31, 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 25,653 | 35,863 |
Issued in Lieu of Cash Distributions | 4,906 | 5,845 |
Redeemed | (22,639) | (27,294) |
Net Increase (Decrease) in Shares Outstanding | 7,920 | 14,414 |
I. Management has determined that no material events or transactions occurred subsequent to April 30, 2016, that would require recognition or disclosure in these financial statements. | ||
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
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Six Months Ended April 30, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
International Value Fund | 10/31/2015 | 4/30/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $975.20 | $2.21 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.63 | 2.26 |
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 0.45%. 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 (182/366). | |||
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Trustees Approve Advisory Arrangements
The board of trustees of Vanguard International Value Fund has renewed the fund’s investment advisory arrangements with ARGA Investment Management, LP (ARGA); Edinburgh Partners Limited (Edinburgh Partners); and Lazard Asset Management LLC, (Lazard). The board determined that renewing the fund’s advisory arrangements was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term, and took into account the organizational depth and stability of each advisor. The board considered the following:
ARGA. ARGA is an independent investment management firm focused on global equities. ARGA invests in businesses that it believes are undervalued based on long-term earnings power and dividend-paying capability. ARGA’s investment philosophy is based on the belief that investors overreact to short-term developments, leading to opportunities to generate gains from investing in “good businesses at great prices.” Its deep-value-oriented process uses a dividend discount model to select stocks that trade at a discount to intrinsic value and can often lead to significant allocations to beaten-down sectors and countries. ARGA has advised a portion of the fund since 2012.
Edinburgh Partners. Founded in 2003, Edinburgh Partners is an independent fund management company specializing in global investment analysis. Edinburgh Partners employs a concentrated, low-turnover, value-oriented investment approach that results in a portfolio of companies with good long-term prospects and below-market price/earnings ratios. In-depth fundamental research on companies and industries is central to Edinburgh Partners’ investment process. The firm conducts scenario analysis to determine the full range of potential outcomes and focuses on long-term, five-year earnings rather than shorter-term results. Edinburgh Partners has advised a portion of the fund since 2008.
Lazard. Lazard provides investment management services for clients around the world in a variety of investment mandates, including international equities, domestic equities, and fixed income securities. The investment team at Lazard employs a bottom-up stock selection process to identify stocks with sustainable financial productivity and attractive valuations. The investment process incorporates three types of investment research: financial screening, fundamental analysis, and accounting validation. Lazard heavily utilizes scenario analysis to understand the risks that macroeconomic factors pose to investment theses and the full range of potential outcomes for each holding. Lazard is a subsidiary of Lazard Freres & Co. LLC and has advised a portion of the fund since 2006.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangements.
Investment performance
The board considered the short- and long-term performance of the fund and each advisor, including any periods of outperformance or underperformance relative to a benchmark index and peer group. The board concluded that the performance was such that the advisory arrangements should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
33
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the fund’s advisory fee rate.
The board did not consider profitability of ARGA, Edinburgh Partners, or Lazard in determining whether to approve the advisory fees, because the firms are independent of Vanguard, and the advisory fees are the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedule for ARGA, Edinburgh Partners, and Lazard. The breakpoints reduce the effective rate of the fee as the fund’s assets managed by each advisor increase.
The board will consider whether to renew the advisory arrangements again after a one-year period.
34
Glossary
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
35
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
Benchmark Information
Spliced International Index: MSCI EAFE Index through May 31, 2010; MSCI All Country World Index ex USA thereafter.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International plc (diversified manufacturing and |
the investment companies served by The Vanguard | services), HP Inc. (printer and personal computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive plc |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at |
President of The Vanguard Group, and of each of | New Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and Other | appointments in the Department of Philosophy, School |
Experience: Executive Chief Staff and Marketing | of Arts and Sciences, and at the Graduate School of |
Officer for North America and Corporate Vice President | Education, University of Pennsylvania; Trustee of the |
(retired 2008) of Xerox Corporation (document manage- | National Constitution Center; Chair of the Presidential |
ment products and services); Executive in Residence | Commission for the Study of Bioethical Issues. |
and 2009–2010 Distinguished Minett Professor at | |
the Rochester Institute of Technology; Lead Director | JoAnn Heffernan Heisen |
of SPX FLOW, Inc. (multi-industry manufacturing); | Born 1950. Trustee Since July 1998. Principal |
Director of the United Way of Rochester, the University | Occupation(s) During the Past Five Years and |
of Rochester Medical Center, Monroe Community | Other Experience: Corporate Vice President and |
College Foundation, North Carolina A&T University, | Chief Global Diversity Officer (retired 2008) and |
and Roberts Wesleyan College. | Member of the Executive Committee (1997–2008) |
of Johnson & Johnson (pharmaceuticals/medical | |
devices/consumer products); Director of Skytop | |
Lodge Corporation (hotels) and the Robert Wood | |
Johnson Foundation; Member of the Advisory | |
Board of the Institute for Women’s Leadership | |
at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Treasurer Since May 2015. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Other Experience: Principal of The Vanguard Group, | |
consumer services), and of Oxfam America; Director | Inc.; Treasurer of each of the investment companies | |
of SKF AB (industrial machinery), Hyster-Yale Materials | served by The Vanguard Group; Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2010–2015); Assistant Controller of each of | |
Research; Member of the Advisory Council for the | the investment companies served by The Vanguard | |
College of Arts and Letters and of the Advisory Board | Group (2001–2010). | |
to the Kellogg Institute for International Studies, both | ||
at the University of Notre Dame. | Thomas J. Higgins | |
Born 1957. Chief Financial Officer Since September | ||
Mark Loughridge | 2008. Principal Occupation(s) During the Past Five | |
Born 1953. Trustee Since March 2012. Principal | Years and Other Experience: Principal of The Vanguard | |
Occupation(s) During the Past Five Years and Other | Group, Inc.; Chief Financial Officer of each of the | |
Experience: Senior Vice President and Chief Financial | investment companies served by The Vanguard Group; | |
Officer (retired 2013) at IBM (information technology | Treasurer of each of the investment companies served | |
services); Fiduciary Member of IBM’s Retirement Plan | by The Vanguard Group (1998–2008). | |
Committee (2004–2013); Director of the Dow Chemical | ||
Company; Member of the Council on Chicago Booth. | Peter Mahoney | |
Born 1974. Controller Since May 2015. Principal | ||
Scott C. Malpass | Occupation(s) During the Past Five Years and | |
Born 1962. Trustee Since March 2012. Principal | Other Experience: Head of Global Fund Accounting | |
Occupation(s) During the Past Five Years and Other | at The Vanguard Group, Inc.; Controller of each of the | |
Experience: Chief Investment Officer and Vice | investment companies served by The Vanguard Group; | |
President at the University of Notre Dame; Assistant | Head of International Fund Services at The Vanguard | |
Professor of Finance at the Mendoza College of | Group (2008–2014). | |
Business at Notre Dame; Member of the Notre Dame | ||
403(b) Investment Committee, the Board of Advisors | Heidi Stam | |
for Spruceview Capital Partners, and the Investment | Born 1956. Secretary Since July 2005. Principal | |
Advisory Committee of Major League Baseball; Board | Occupation(s) During the Past Five Years and Other | |
Member of TIFF Advisory Services, Inc., and Catholic | Experience: Managing Director of The Vanguard | |
Investment Services, Inc. (investment advisors). | Group, Inc.; General Counsel of The Vanguard Group; | |
Secretary of The Vanguard Group and of each of the | ||
André F. Perold | investment companies served by The Vanguard Group; | |
Born 1952. Trustee Since December 2004. Principal | Director and Senior Vice President of Vanguard | |
Occupation(s) During the Past Five Years and Other | Marketing Corporation. | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Vanguard Senior Managemen tTeam | |
(retired 2011); Chief Investment Officer and Managing | Mortimer J. Buckley | James M. Norris |
Partner of HighVista Strategies LLC (private investment | Kathleen C. Gubanich | Thomas M. Rampulla |
firm); Director of Rand Merchant Bank; Overseer of | Martha G. King | Glenn W. Reed |
the Museum of Fine Arts Boston. | John T. Marcante | Karin A. Risi |
Chris D. McIsaac | ||
Peter F. Volanakis | ||
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Chairman Emeritus and Senior Advisor | |
Experience: President and Chief Operating Officer | ||
(retired 2010) of Corning Incorporated (communications | John J. Brennan | |
equipment); Trustee of Colby-Sawyer College and | Chairman, 1996–2009 | |
Chairman of its Finance and Enrollment Committee; | Chief Executive Officer and President, 1996–2008 | |
Member of the Advisory Board of the Norris Cotton | ||
Cancer Center. | Founder | |
John C. Bogle | ||
Chairman and Chief Executive Officer, 1974–1996 |
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600 | ||
Valley Forge, PA 19482-2600 | ||
Connect with Vanguard® > vanguard.com | ||
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This material may be used in conjunction | ||
with the offering of shares of any Vanguard | ||
fund only if preceded or accompanied by | ||
the fund’s current prospectus. | ||
All comparative mutual fund data are from Lipper, a | ||
Thomson Reuters Company, or Morningstar, Inc., unless | ||
otherwise noted. | ||
You can obtain a free copy of Vanguard’s proxy voting | ||
guidelines by visiting vanguard.com/proxyreporting or by | ||
calling Vanguard at 800-662-2739. The guidelines are | ||
also available from the SEC’s website, sec.gov. In | ||
addition, you may obtain a free report on how your fund | ||
voted the proxies for securities it owned during the 12 | ||
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vanguard.com/proxyreporting or sec.gov. | ||
You can review and copy information about your fund at | ||
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publicinfo@sec.gov or via regular mail addressed to the | ||
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Commission, Washington, DC 20549-1520. | ||
© 2016 The Vanguard Group, Inc. | ||
All rights reserved. | ||
Vanguard Marketing Corporation, Distributor. | ||
Q462 062016 |
Semiannual Report | April 30, 2016
Vanguard Diversified Equity Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Fund Profile. | 8 |
Performance Summary. | 9 |
Financial Statements. | 10 |
About Your Fund’s Expenses. | 18 |
Trustees Approve Advisory Arrangement. | 20 |
Glossary. | 21 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows us to help millions of clients around the world reach their financial goals.
Your Fund’s Total Returns
Six Months Ended April 30, 2016 | |
Total | |
Returns | |
Vanguard Diversified Equity Fund | -2.07% |
MSCI US Broad Market Index | 0.02 |
Multi-Cap Core Funds Average | -1.25 |
Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Your Fund’s Performance at a Glance | ||||
October 31, 2015, Through April 30, 2016 | ||||
Distributions Per Share | ||||
Starting | Ending | Income | Capital | |
Share Price | Share Price | Dividends | Gains | |
Vanguard Diversified Equity Fund | $33.15 | $29.71 | $0.362 | $2.449 |
1
Chairman’s Letter
Dear Shareholder,
Vanguard Diversified Equity Fund returned –2.07% for the six months ended April 30, 2016. The fund lagged its benchmark, the MSCI US Broad Market Index, and the average return of its peers.
As a “fund of funds,” Diversified Equity invests in eight actively managed Vanguard funds selected to ensure that the fund will have broad exposure to all segments of the U.S. equity market. These funds are actively managed by highly regarded investment advisors, each of whom brings years of experience and time-tested investment approaches to your fund.
For the six months, results for the eight funds ranged from about –5% for Vanguard Mid-Cap Growth Fund to less than 1% for Vanguard Growth and Income Fund. Vanguard Explorer™ Fund was the sole fund in the group to outpace its benchmark for the six months.
U.S. stocks traveled a rocky road, finishing the period about even
The broad U.S. stock market delivered flat returns for a half year marked by inconsistency, sharp declines, and even sharper rallies.
After struggling during the first four months of the period, U.S. stocks rebounded in the final two. Most of the surge came in March as investors cheered
2
the Federal Reserve’s indication that it would scale back its original plan for interest rate hikes in 2016. Continued aggressive stimulus by central bankers in Europe and Asia and a recovery in oil prices also helped.
International stocks traced an even rockier path than their U.S. counterparts en route to modestly negative returns. Developed markets, especially Europe, notched weak results, while emerging markets managed a slight advance.
Bonds have proved attractive with some help from the Fed
The broad U.S. bond market returned 2.82% for the half year. After retreating in November and December, the bond market recorded positive results for each of the next four months. It also received a boost from the Fed’s cautious approach to raising short-term interest rates.
The yield of the 10-year U.S. Treasury note closed at 1.83% at the end of April, down from 2.17% six months earlier. (Bond prices and yields move in opposite directions.)
Even though the Fed raised short-term interest rates a quarter percentage point in December, the target rate of 0.25%–0.5% is still very low historically, and it restrained returns for money market funds and savings accounts.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 8.72%. In a reversal from the trend of recent years, foreign
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2016 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 0.22% | 0.34% | 10.81% |
Russell 2000 Index (Small-caps) | -1.90 | -5.94 | 6.98 |
Russell 3000 Index (Broad U.S. market) | 0.06 | -0.18 | 10.50 |
FTSE All-World ex US Index (International) | -1.52 | -10.65 | 0.25 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 2.82% | 2.72% | 3.60% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 3.55 | 5.29 | 5.37 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.08 | 0.10 | 0.05 |
CPI | |||
Consumer Price Index | 0.60% | 1.13% | 1.25% |
3
currencies strengthened against the dollar, helping international bonds. Even without this currency benefit, however, international bond returns were solid.
All but one fund underperformed, and this hurt the fund’s returns
As I mentioned earlier, Diversified Equity invests in eight actively managed Vanguard funds. Together, these funds—Growth and Income Fund, Vanguard Morgan™ Growth Fund, Vanguard Windsor™ Fund, Vanguard Windsor II Fund, Vanguard U.S. Growth Fund, Explorer Fund, Vanguard Capital Value Fund, and Mid-Cap Growth Fund—cover the style and capitalization spectrum, investing in growth and value, as well as small-, mid-, and large-cap companies.
For the six months, value stocks outperformed growth stocks, while large-cap stocks generally outpaced their smaller counterparts. Although Diversified Equity’s underlying funds more or less followed these broader market trends, seven of the eight funds failed to keep pace with their respective benchmarks.
Growth and Income, which invests in both growth and value large-cap stocks, registered a slight gain. This fund—Diversified Equity’s largest holding at about 20%—was the only one in the group to close out the period in positive territory.
The three value-oriented funds failed to capitalize on the modest rise of value stocks during the half year. Windsor II—which
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Acquired Fund Fees | Peer Group | |
and Expenses | Average | |
Diversified Equity Fund | 0.40% | 1.17% |
The acquired fund fees and expenses—drawn from the prospectus dated February 25, 2016—represent an estimate of the weighted average of the expense ratios and any transaction fees charged by the underlying mutual funds (the ”acquired” funds) in which the Diversified Equity Fund invests. The Diversified Equity Fund does not charge any expenses or fees of its own. For the six months ended April 30, 2016, the annualized acquired fund fees and expenses were 0.36%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.
Peer group: Multi-Cap Core Funds.
4
Do U.S.-based multinationals provide enough global diversification? |
Some investors believe that their portfolios get enough exposure to international stocks |
through their holdings in large-capitalization, multinational U.S. companies such as the ones |
represented in the Standard & Poor’s 500 Index. After all, those firms generated almost half |
of their total sales outside the United States in 2014.* |
However, international exposure based only on a broad index of U.S.-based companies would |
be patchy at best. The near-even split of domestic and foreign sales for S&P 500 companies |
is an average; when you look at individual sectors, a different picture emerges. Information |
technology firms earned the highest percentage of sales abroad (almost 60% in 2014). Utilities |
and telecommunication services, which tend to operate regionally or nationally, generated the |
least overseas revenue. |
As the chart below shows, such a portfolio would also differ significantly from a broadly |
diversified global portfolio in some sector weightings. It would, for example, have more |
exposure to IT and health care stocks and considerably less to materials and financials. |
The bottom line: Large-cap U.S. stocks can give you a degree of exposure to international |
economic and market forces, but not to the same extent as a combination of both U.S. and |
non-U.S. stocks. |
S&P 500 Index sector weightings vary from those of global stocks |
(Differences in percentage points) |
Notes: Data are 12-month-average sector weightings as of March 31, 2016. Global stocks are represented by the FTSE All-World Index. |
Sources: Vanguard calculations, based on data from S&P Dow Jones Indices LLC and FTSE International Limited. |
* All S&P 500 Index and sector revenue data are from S&P Dow Jones Indices LLC for 2014. |
There are additional risks when investing outside the United States, including the possibility that returns will be hurt |
by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region. |
5
invests primarily in large-cap value stocks, or stocks of companies that its advisor believes are inexpensive in relation to company earnings or other metrics—was the trio’s top performer, with an essentially flat return. Windsor, which also focuses on large-cap value stocks, was next in line with a return of about –2%. Capital Value, which focuses mostly on mid-cap value companies, returned about –3%.
Among the growth-oriented funds, Explorer which invests in smaller companies, was the best performer, returning about –2%. Despite its disappointing results, the fund bested its benchmark index, which had an even more sharply negative return.
The lowest returns came from funds that focus on large- and mid-cap growth stocks. U.S. Growth, which favors larger companies, returned a bit more than –4%, while Morgan Growth, which holds stocks of both mid- and large-sized firms, returned a bit less than –4%. Mid-Cap Growth, which focuses on mid-sized companies, returned about –5%.
Whether it’s index or active, low costs and talent matter
If you listen to some investing pundits, you might think index investing and actively managed investing are incompatible opposites. We at Vanguard don’t see it that way.
Underlying Funds: Allocations and Returns | ||
Six Months Ended April 30, 2016 | ||
Percentage of | ||
Diversified Equity Fund | ||
Vanguard Fund | Assets | Total Returns |
Vanguard Growth and Income Fund Investor | ||
Shares | 20.1% | 0.28% |
Vanguard Windsor Fund Investor Shares | 15.1 | -2.18 |
Vanguard Windsor II Fund Investor Shares | 15.0 | -0.01 |
Vanguard U.S. Growth Fund Investor Shares | 14.8 | -3.80 |
Vanguard Morgan Growth Fund Investor Shares | 14.8 | -4.32 |
Vanguard Explorer Fund Investor Shares | 10.2 | -1.56 |
Vanguard Mid-Cap Growth Fund | 5.0 | -5.45 |
Vanguard Capital Value Fund | 5.0 | -3.31 |
Combined | 100.0% | -2.07% |
6
To us, it’s not index versus active. In fact, depending on your goals, it could well be index and active.
Vanguard is a pioneer in index investing. In 1976, we opened the first index mutual fund, giving shareholders an opportunity to track the performance of the S&P 500 Index. But our roots in active management—which aims to choose investments that will outperform the market—go back to the 1929 launch of what became Vanguard Wellington™ Fund.
Our index and active funds share important traits. Both are low cost, and as their assets grow, we can take advantage of the economies of scale by further reducing fund expense ratios. That allows you to keep more of your fund’s returns.
And low costs aren’t the whole story. Talent and experience are vital, regardless of a fund’s management style.
When it comes to indexing, portfolio managers in our Equity Index Group and Fixed Income Group have honed their expertise over decades. That expertise helps our index funds meet their objectives of closely tracking their benchmarks.
Our active funds, too, benefit from world-class managers—both our own experts and premier money managers we hire around the globe. There’s no guarantee that active management will lead to market-beating results, but the combination of talent and low costs can give investors a better chance of success.
If you’d like to know more, see Keys to Improving the Odds of Active Management Success and The Case for Index-Fund Investing, available at vanguard.com/research.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 11, 2016
7
Diversified Equity Fund
Fund Profile
As of April 30, 2016
Portfolio Characteristics | ||
MSCI US | ||
Broad Market | ||
Fund | Index | |
Number of Stocks | 1,579 | 3,226 |
Median Market Cap | $46.7B | $51.6B |
Price/Earnings Ratio | 20.2x | 22.0x |
Price/Book Ratio | 2.2x | 2.7x |
Return on Equity | 16.5% | 16.9% |
Earnings Growth | ||
Rate | 7.1% | 7.8% |
Dividend Yield | 2.1% | 2.1% |
Turnover Rate | ||
(Annualized) | 14% | — |
Ticker Symbol | VDEQX | — |
Acquired Fund Fees | ||
and Expenses1 | 0.40% | — |
30-Day SEC Yield | 1.31% | — |
Allocation to Underlying Vanguard Funds | |
Vanguard Growth and Income Fund | |
Investor Shares | 20.1% |
Vanguard Windsor Fund Investor Shares | 15.1 |
Vanguard Windsor II Fund Investor Shares | 15.0 |
Vanguard U.S. Growth Fund Investor | |
Shares | 14.8 |
Vanguard Morgan Growth Fund Investor | |
Shares | 14.8 |
Vanguard Explorer Fund Investor Shares | 10.2 |
Vanguard Mid-Cap Growth Fund | 5.0 |
Vanguard Capital Value Fund | 5.0 |
Volatility Measures | |
MSCI US | |
Broad Market | |
Index | |
R-Squared | 0.98 |
Beta | 1.04 |
These measures show the degree and timing of the fund’s fluctuations compared with the index over 36 months. | |
Sector Diversification (% of equity exposure) | ||
MSCI US | ||
Broad Market | ||
Fund | Index | |
Consumer Discretionary | 12.1% | 13.6% |
Consumer Staples | 7.3 | 9.1 |
Energy | 9.1 | 6.7 |
Financials | 19.7 | 17.3 |
Health Care | 16.6 | 14.1 |
Industrials | 10.3 | 10.9 |
Information Technology | 18.2 | 19.1 |
Materials | 2.6 | 3.4 |
Telecommunication Services | 2.2 | 2.4 |
Utilities | 1.9 | 3.4 |
Fund percentages reflect holdings of underlying funds. |
Diversified Equity 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.
Fiscal-Year Total Returns (%): October 31, 2005, Through April 30, 2016
Average Annual Total Returns: Periods Ended March 31, 2016 | ||||
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. | ||||
Securities and Exchange Commission rules require that we provide this information. | ||||
Inception | One | Five | Ten | |
Date | Year | Years | Years | |
Diversified Equity Fund | 6/10/2005 | -3.53% | 10.25% | 6.26% |
See Financial Highlights for dividend and capital gains information.
9
Diversified Equity Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2016
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | ||
Value• | ||
Shares | ($000) | |
Investment Companies (100.0%) | ||
U.S. Stock Funds (100.0%) | ||
Vanguard Growth and Income Fund Investor Shares | 6,639,943 | 266,859 |
Vanguard Windsor Fund Investor Shares | 10,432,968 | 200,104 |
Vanguard Windsor II Fund Investor Shares | 5,773,158 | 198,828 |
Vanguard U.S. Growth Fund Investor Shares | 6,902,359 | 197,062 |
Vanguard Morgan Growth Fund Investor Shares | 8,143,949 | 196,839 |
Vanguard Explorer Fund Investor Shares | 1,682,421 | 135,620 |
Vanguard Mid-Cap Growth Fund | 3,075,488 | 66,923 |
Vanguard Capital Value Fund | 6,060,191 | 65,753 |
Total Investment Companies (Cost $1,014,445) | 1,327,988 | |
Amount | ||
($000) | ||
Other Assets and Liabilities (0.0%) | ||
Other Assets | ||
Receivables for Investment Securities Sold | 1,079 | |
Receivables for Capital Shares Issued | 168 | |
Total Other Assets | 1,247 | |
Liabilities | ||
Payables for Capital Shares Redeemed | (1,500) | |
Other Liabilities | (64) | |
Total Liabilities | (1,564) | |
Net Assets (100%) | ||
Applicable to 44,685,154 outstanding $.001 par value shares of | ||
beneficial interest (unlimited authorization) | 1,327,671 | |
Net Asset Value Per Share | $29.71 |
10
Diversified Equity Fund
At April 30, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 926,653 |
Undistributed Net Investment Income | 20 |
Accumulated Net Realized Gains | 87,455 |
Unrealized Appreciation (Depreciation) | 313,543 |
Net Assets | 1,327,671 |
• See Note A in Notes to Financial Statements.
See accompanying Notes, which are an integral part of the Financial Statements.
11
Diversified Equity Fund
Statement of Operations
Six Months Ended | |
April 30, 2016 | |
($000) | |
Investment Income | |
Income | |
Income Distributions Received | 10,450 |
Net Investment Income—Note B | 10,450 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received | 95,473 |
Affiliated Investment Securities Sold | (914) |
Realized Net Gain (Loss) | 94,559 |
Change in Unrealized Appreciation (Depreciation) of Investment Securities | (137,333) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (32,324) |
See accompanying Notes, which are an integral part of the Financial Statements.
12
Diversified Equity Fund
Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 10,450 | 17,392 |
Realized Net Gain (Loss) | 94,559 | 127,323 |
Change in Unrealized Appreciation (Depreciation) | (137,333) | (75,614) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (32,324) | 69,101 |
Distributions | ||
Net Investment Income | (15,681) | (15,306) |
Realized Capital Gain1 | (106,084) | (55,272) |
Total Distributions | (121,765) | (70,578) |
Capital Share Transactions | ||
Issued | 45,868 | 145,790 |
Issued in Lieu of Cash Distributions | 116,441 | 67,884 |
Redeemed | (136,145) | (269,946) |
Net Increase (Decrease) from Capital Share Transactions | 26,164 | (56,272) |
Total Increase (Decrease) | (127,925) | (57,749) |
Net Assets | ||
Beginning of Period | 1,455,596 | 1,513,345 |
End of Period2 | 1,327,671 | 1,455,596 |
1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $9,876,000 and $16,694,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. | ||
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $20,000 and $5,251,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
13
Diversified Equity Fund
Financial Highlights
Six Months | ||||||
Ended | ||||||
For a Share Outstanding | April 30, | Year Ended October 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $33.15 | $33.18 | $29.43 | $22.70 | $20.34 | $19.13 |
Investment Operations | ||||||
Net Investment Income | .242 | .394 | .3221 | .332 | .262 | .228 |
Capital Gain Distributions Received | 1.944 | 2.606 | .8481 | .131 | .034 | — |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments | (2.815) | (1.453) | 3.243 | 6.626 | 2.310 | 1.192 |
Total from Investment Operations | (.629) | 1. 547 | 4.413 | 7.089 | 2.606 | 1.420 |
Distributions | ||||||
Dividends from Net Investment Income | (. 362) | (. 342) | (. 283) | (. 344) | (. 246) | (. 210) |
Distributions from Realized Capital Gains | (2.449) | (1.235) | (.380) | (.015) | — | — |
Total Distributions | (2.811) | (1.577) | (.663) | (.359) | (.246) | (.210) |
Net Asset Value, End of Period | $29.71 | $33.15 | $33.18 | $29.43 | $22.70 | $20.34 |
Total Return2 | -2.07% | 4.71% | 15.20% | 31.70% | 12.97% | 7.42% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $1,328 | $1,456 | $1,513 | $1,420 | $1,173 | $1,183 |
Ratio of Total Expenses to | ||||||
Average Net Assets | — | — | — | — | — | — |
Acquired Fund Fees and Expenses | 0.36% | 0.40% | 0.41% | 0.40% | 0.40% | 0.41% |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 1.27% | 1.16% | 1.03% | 1.27% | 1.18% | 1.09% |
Portfolio Turnover Rate | 14% | 10% | 5% | 5% | 3% | 3% |
The expense ratio, acquired fund fees and expenses, net income ratio, and turnover rate for the current period have been annualized. | ||||||
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.
14
Diversified Equity Fund
Notes to Financial Statements
Vanguard Diversified Equity Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in selected Vanguard actively managed U.S. stock funds. Financial statements and other information about each underlying fund are available on vanguard.com.
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: Investments are valued at the net asset value of each underlying Vanguard fund determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date.
2. 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 (October 31, 2012–2015), and for the period ended April 30, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
4. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and borne by the funds in which the fund invests (see Note B). 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 April 30, 2016, or at any time during the period then ended.
5. Other: Income and capital gain distributions received are recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. The FSA provides that expenses otherwise allocable to Vanguard funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services provided by Vanguard to the fund and all other expenses incurred by the fund during the period ended April 30, 2016, were borne by the underlying Vanguard funds in which the fund invests. The fund’s trustees and officers are also trustees and officers, respectively, of the underlying Vanguard funds, as well as directors and employees, respectively, of Vanguard.
15
Diversified Equity Fund
C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 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).
At April 30, 2016, 100% of the market value of the fund’s investments was determined based on Level 1 inputs.
D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.
At April 30, 2016, the cost of investment securities for tax purposes was $1,014,445,000. Net unrealized appreciation of investment securities for tax purposes was $313,543,000, consisting entirely of unrealized gains on securities that had risen in value since their purchase.
E. Capital shares issued and redeemed were:
Six Months Ended | Year Ended | |
April 30, 2016 | October 31, 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 1,538 | 4,387 |
Issued in Lieu of Cash Distributions | 3,838 | 2,068 |
Redeemed | (4,606) | (8,157) |
Net Increase (Decrease) in Shares Outstanding | 770 | (1,702) |
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Diversified Equity Fund
F. Transactions during the period in affiliated underlying Vanguard funds were as follows:
Current Period Transactions | ||||||
October 31, | Proceeds | April 30, | ||||
2015 | from | Capital Gain | 2016 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Vanguard Capital Value Fund | 67,200 | 8,679 | 1,221 | 794 | 5,766 | 65,753 |
Vanguard Explorer Fund | 139,827 | 14,036 | 2,877 | 414 | 12,793 | 135,620 |
Vanguard Growth and | ||||||
Income Fund | 293,510 | 17,994 | 26,205 | 2,632 | 15,362 | 266,859 |
Vanguard Mid-Cap Growth Fund | 72,741 | 5,372 | 1,852 | 204 | 5,168 | 66,923 |
Vanguard Morgan Growth Fund | 222,885 | 16,967 | 16,560 | 1,386 | 15,580 | 196,839 |
Vanguard U.S. Growth Fund | 221,458 | 17,624 | 16,288 | 971 | 16,627 | 197,062 |
Vanguard Windsor Fund | 218,792 | 14,990 | 13,991 | 1,701 | 13,079 | 200,104 |
Vanguard Windsor II Fund | 219,481 | 13,446 | 19,773 | 2,348 | 11,098 | 198,828 |
Total | 1,455,894 | 109,108 | 98,767 | 10,450 | 95,473 | 1,327,988 |
G. Management has determined that no material events or transactions occurred subsequent to April 30, 2016, that would require recognition or disclosure in these financial statements.
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About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A typical fund’s expenses are expressed as a percentage of its average net assets. The Diversified Equity Fund has no direct expenses, but bears its proportionate share of the costs for the underlying funds in which it invests. These indirect expenses make up the acquired fund fees and expenses, also expressed as a percentage of average net assets.
The following examples are intended to help you understand the ongoing cost (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 costs were calculated using the acquired fund fees and expenses for the Diversified Equity Fund.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
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Six Months Ended April 30, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Diversified Equity Fund | 10/31/2015 | 4/30/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $979.26 | $1.77 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.07 | 1.81 |
The calculations are based on acquired fund fees and expenses charged by the underlying mutual funds in which the Diversified Equity Fund invests. The Diversified Equity Fund’s annualized expense figure for the period is 0.36%. The dollar amounts shown as ”Expenses Paid” are equal to the annualized average weighted expense ratio for the underlying funds 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 (182/366). | |||
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Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Diversified Equity Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard)—through its Equity Index Group. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term, and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Equity Index Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance relative to a benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s acquired fund fees and expenses were well below the average expense ratio charged by funds in its peer group. The fund does not incur advisory expenses directly; however, the board noted that each of the underlying funds in which the fund invests has advisory expenses well below the relevant peer-group average. Information about the fund’s acquired fund fees and expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section.
The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.
The benefit of economies of scale
The board concluded that Vanguard’s at-cost arrangement with the fund and its underlying funds ensures that the fund will realize economies of scale as the assets of the underlying funds grow, with the cost to shareholders declining as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
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Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Acquired Fund Fees and Expenses. Funds that invest in other Vanguard funds incur no direct expenses, but they do bear proportionate shares of the operating, administrative, and advisory expenses of the underlying funds, and they must pay any fees charged by those funds. The figure for acquired fund fees and expenses represents a weighted average of these underlying costs. Acquired is a term that the Securities and Exchange Commission applies to any mutual fund whose shares are owned by another fund.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
21
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International plc (diversified manufacturing and |
the investment companies served by The Vanguard | services), HP Inc. (printer and personal computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive plc |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at |
President of The Vanguard Group, and of each of | New Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and Other | appointments in the Department of Philosophy, School |
Experience: Executive Chief Staff and Marketing | of Arts and Sciences, and at the Graduate School of |
Officer for North America and Corporate Vice President | Education, University of Pennsylvania; Trustee of the |
(retired 2008) of Xerox Corporation (document manage- | National Constitution Center; Chair of the Presidential |
ment products and services); Executive in Residence | Commission for the Study of Bioethical Issues. |
and 2009–2010 Distinguished Minett Professor at | |
the Rochester Institute of Technology; Lead Director | JoAnn Heffernan Heisen |
of SPX FLOW, Inc. (multi-industry manufacturing); | Born 1950. Trustee Since July 1998. Principal |
Director of the United Way of Rochester, the University | Occupation(s) During the Past Five Years and |
of Rochester Medical Center, Monroe Community | Other Experience: Corporate Vice President and |
College Foundation, North Carolina A&T University, | Chief Global Diversity Officer (retired 2008) and |
and Roberts Wesleyan College. | Member of the Executive Committee (1997–2008) |
of Johnson & Johnson (pharmaceuticals/medical | |
devices/consumer products); Director of Skytop | |
Lodge Corporation (hotels) and the Robert Wood | |
Johnson Foundation; Member of the Advisory | |
Board of the Institute for Women’s Leadership | |
at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Treasurer Since May 2015. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Other Experience: Principal of The Vanguard Group, | |
consumer services), and of Oxfam America; Director | Inc.; Treasurer of each of the investment companies | |
of SKF AB (industrial machinery), Hyster-Yale Materials | served by The Vanguard Group; Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2010–2015); Assistant Controller of each of | |
Research; Member of the Advisory Council for the | the investment companies served by The Vanguard | |
College of Arts and Letters and of the Advisory Board | Group (2001–2010). | |
to the Kellogg Institute for International Studies, both | ||
at the University of Notre Dame. | Thomas J. Higgins | |
Born 1957. Chief Financial Officer Since September | ||
Mark Loughridge | 2008. Principal Occupation(s) During the Past Five | |
Born 1953. Trustee Since March 2012. Principal | Years and Other Experience: Principal of The Vanguard | |
Occupation(s) During the Past Five Years and Other | Group, Inc.; Chief Financial Officer of each of the | |
Experience: Senior Vice President and Chief Financial | investment companies served by The Vanguard Group; | |
Officer (retired 2013) at IBM (information technology | Treasurer of each of the investment companies served | |
services); Fiduciary Member of IBM’s Retirement Plan | by The Vanguard Group (1998–2008). | |
Committee (2004–2013); Director of the Dow Chemical | ||
Company; Member of the Council on Chicago Booth. | Peter Mahoney | |
Born 1974. Controller Since May 2015. Principal | ||
Scott C. Malpass | Occupation(s) During the Past Five Years and | |
Born 1962. Trustee Since March 2012. Principal | Other Experience: Head of Global Fund Accounting | |
Occupation(s) During the Past Five Years and Other | at The Vanguard Group, Inc.; Controller of each of the | |
Experience: Chief Investment Officer and Vice | investment companies served by The Vanguard Group; | |
President at the University of Notre Dame; Assistant | Head of International Fund Services at The Vanguard | |
Professor of Finance at the Mendoza College of | Group (2008–2014). | |
Business at Notre Dame; Member of the Notre Dame | ||
403(b) Investment Committee, the Board of Advisors | Heidi Stam | |
for Spruceview Capital Partners, and the Investment | Born 1956. Secretary Since July 2005. Principal | |
Advisory Committee of Major League Baseball; Board | Occupation(s) During the Past Five Years and Other | |
Member of TIFF Advisory Services, Inc., and Catholic | Experience: Managing Director of The Vanguard | |
Investment Services, Inc. (investment advisors). | Group, Inc.; General Counsel of The Vanguard Group; | |
Secretary of The Vanguard Group and of each of the | ||
André F. Perold | investment companies served by The Vanguard Group; | |
Born 1952. Trustee Since December 2004. Principal | Director and Senior Vice President of Vanguard | |
Occupation(s) During the Past Five Years and Other | Marketing Corporation. | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Vanguard Senior ManagementTeam | |
(retired 2011); Chief Investment Officer and Managing | ||
Partner of HighVista Strategies LLC (private investment | Mortimer J. Buckley | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Kathleen C. Gubanich | Thomas M. Rampulla |
the Museum of Fine Arts Boston. | Martha G. King | Glenn W. Reed |
Peter F. Volanakis | John T. Marcante | Karin A. Risi |
Born 1955. Trustee Since July 2009. Principal | Chris D. McIsaac | |
Occupation(s) During the Past Five Years and Other | ||
Experience: President and Chief Operating Officer | ||
(retired 2010) of Corning Incorporated (communications | Chairman Emeritus and Senior Advisor | |
equipment); Trustee of Colby-Sawyer College and | John J. Brennan | |
Chairman of its Finance and Enrollment Committee; | Chairman, 1996–2009 | |
Member of the Advisory Board of the Norris Cotton | Chief Executive Officer and President, 1996–2008 | |
Cancer Center. | ||
Founder | ||
John C. Bogle | ||
Chairman and Chief Executive Officer, 1974–1996 |
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | |
Direct Investor Account Services > 800-662-2739 | |
Institutional Investor Services > 800-523-1036 | |
Text Telephone for People | |
Who Are Deaf or Hard of Hearing> 800-749-7273 | |
This material may be used in conjunction | |
with the offering of shares of any Vanguard | |
fund only if preceded or accompanied by | |
the fund’s current prospectus. | |
All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
otherwise noted. | |
You can obtain a free copy of Vanguard’s proxy voting | |
guidelines by visiting vanguard.com/proxyreporting or by | |
calling Vanguard at 800-662-2739. The guidelines are | |
also available from the SEC’s website, sec.gov. In | |
addition, you may obtain a free report on how your fund | |
voted the proxies for securities it owned during the 12 | |
months ended June 30. To get the report, visit either | |
vanguard.com/proxyreporting or sec.gov. | |
You can review and copy information about your fund at | |
the SEC’s Public Reference Room in Washington, D.C. To | |
find out more about this public service, call the SEC at | |
202-551-8090. Information about your fund is also | |
available on the SEC’s website, and you can receive | |
copies of this information, for a fee, by sending a | |
request in either of two ways: via email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2016 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q6082 062016 |
Semiannual Report | April 30, 2016
Vanguard Emerging Markets Select
Stock Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisors’ Report. | 8 |
Fund Profile. | 13 |
Performance Summary. | 15 |
Financial Statements. | 16 |
About Your Fund’s Expenses. | 30 |
Trustees Approve Advisory Arrangements. | 32 |
Glossary. | 34 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows us to help millions of clients around the world reach their financial goals.
Your Fund’s Total Returns
Six Months Ended April 30, 2016 | |
Total | |
Returns | |
Vanguard Emerging Markets Select Stock Fund | 2.07% |
FTSE Emerging Index | 0.87 |
Emerging Markets Funds Average | -0.22 |
Emerging Markets Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Your Fund’s Performance at a Glance | ||||
October 31, 2015, Through April 30, 2016 | ||||
Distributions Per Share | ||||
Starting | Ending | Income | Capital | |
Share Price | Share Price | Dividends | Gains | |
Vanguard Emerging Markets Select Stock Fund | $16.48 | $16.51 | $0.284 | $0.000 |
Chairman’s Letter
Dear Shareholder,
Emerging markets stocks went on a volatile ride in the six months ended April 30, 2016, but finished the period with an unremarkable result. Throughout the half year, investors seemed preoccupied with fluctuating commodity prices, China’s slowing economic growth, and the latest signals on monetary policy from the world’s central bankers.
In this environment, Vanguard Emerging Markets Select Stock Fund returned 2.07%. Although modest, the fund’s performance was notably better than the return of its benchmark and the slightly negative average return for peer funds.
The four advisors that manage your fund invest in a range of countries across emerging markets. During the six months, the fund had particularly strong results in Brazil and negative returns in China.
U.S. stocks traveled a rocky road, finishing the period about even
After struggling during the first four months of the period, U.S. stocks rebounded. Most of the surge came in March, as investors cheered the Federal Reserve’s indication that it would scale back its plan for interest rate hikes in 2016. Continued aggressive stimulus by central bankers in Europe and Asia and a recovery in oil prices also helped.
2
International stocks traced an even rockier path than their U.S. counterparts en route to modestly negative returns. Developed markets, especially Europe, notched weak results, while emerging markets managed a slight advance.
With help from the Fed, bonds have proved attractive
The broad U.S. bond market returned 2.82% for the half year. After retreating in November and December, the bond market recorded positive results for each of the next four months. It also received a boost from the Fed’s cautious approach to raising short-term interest rates.
The yield of the 10-year U.S. Treasury note closed at 1.83% at the end of April, down from 2.17% six months earlier. (Bond prices and yields move in opposite directions.)
Even though the Fed raised short-term rates a quarter of a percentage point in December, the target rate of 0.25%–0.5% is still very low historically, and it restrained returns for money market funds and savings accounts.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 8.72%. In a reversal from the trend of recent years, foreign currencies strengthened against the dollar,
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2016 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 0.22% | 0.34% | 10.81% |
Russell 2000 Index (Small-caps) | -1.90 | -5.94 | 6.98 |
Russell 3000 Index (Broad U.S. market) | 0.06 | -0.18 | 10.50 |
FTSE All-World ex US Index (International) | -1.52 | -10.65 | 0.25 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 2.82% | 2.72% | 3.60% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 3.55 | 5.29 | 5.37 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.08 | 0.10 | 0.05 |
CPI | |||
Consumer Price Index | 0.60% | 1.13% | 1.25% |
3
helping international bonds. Even without this currency benefit, international bond returns were solid.
China continues to loom large for emerging markets and your fund
Although still an emerging market, China is indisputably a major force in the global economy. It is also the largest country holding in your fund. (You can see the holding percentage, as of the end of the period, in the Fund Profile section that follows the Advisors’ Report.)
For several years, investors have been concerned about the slowing pace of economic expansion in the world’s most populous country. As Vanguard economists have noted, the slowdown is occurring as
China transitions from an agrarian and manufacturing-based economy to a consumer-driven, service-based one. Some market observers fear that China could slip into recession, which would, of course, have significant global ramifications.
Our economists, however, consider it unlikely that China will fall into recession in the near term. Rather, they anticipate that economic growth will gradually slow to between 5% and 6% annually. That’s still impressive compared with the United States, but it’s well below the double-digit expansions that China recorded in recent years. You can read more in Vanguard’s Economic and Investment Outlook available at vanguard.com/research.
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Emerging Markets Select Stock Fund | 0.93% | 1.54% |
The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2016, the fund’s annualized expense ratio was 0.91%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.
Peer group: Emerging Markets Funds.
Do U.S.-based multinationals provide enough global diversification? |
Some investors believe that their portfolios get enough exposure to international stocks |
through their holdings in large-capitalization, multinational U.S. companies such as the ones |
represented in the Standard & Poor’s 500 Index. After all, those firms generated almost half |
of their total sales outside the United States in 2014.* |
However, international exposure based only on a broad index of U.S.-based companies would |
be patchy at best. The near-even split of domestic and foreign sales for S&P 500 companies |
is an average; when you look at individual sectors, a different picture emerges. Information |
technology firms earned the highest percentage of sales abroad (almost 60% in 2014). Utilities |
and telecommunication services, which tend to operate regionally or nationally, generated the |
least overseas revenue. |
As the chart below shows, such a portfolio would also differ significantly from a broadly |
diversified global portfolio in some sector weightings. It would, for example, have more |
exposure to IT and health care stocks and considerably less to materials and financials. |
The bottom line: Large-cap U.S. stocks can give you a degree of exposure to international |
economic and market forces, but not to the same extent as a combination of both U.S. and |
non-U.S. stocks. |
S&P 500 Index sector weightings vary from those of global stocks |
(Differences in percentage points) |
Notes: Data are 12-month-average sector weightings as of March 31, 2016. Global stocks are represented by the FTSE All-World Index. |
Sources: Vanguard calculations, based on data from S&P Dow Jones Indices LLC and FTSE International Limited. |
* All S&P 500 Index and sector revenue data are from S&P Dow Jones Indices LLC for 2014. |
There are additional risks when investing outside the United States, including the possibility that returns will be hurt |
by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region. |
5
It’s safe to assume that emerging markets investors will experience more volatility. China and other developing nations represent an opportunity, but they also present risks. Vanguard believes that, for most investors, those risks are best managed by maintaining balanced portfolios with broad, global diversification.
For the fiscal half year, Chinese stocks generally declined amid the slowdown concerns. These stocks were the biggest detractors from your fund’s performance.
Other emerging markets, meanwhile, notched outsized gains, apparently boosted by a recovery in commodity prices as well as indications that the Fed was taking a pause on further rate hikes. Your fund’s Brazilian holdings fared especially well.
From a sector standpoint, the fund had its best return in materials, a category that includes steel companies, miners, and chemical makers. Conversely, the fund saw disappointing results in utilities and in consumer staples, which includes stocks such as automakers and soda makers.
For more about the fund’s strategy and positioning, please see the Advisors’ Report that follows my letter.
Whether index or active investing, low costs and talent matter
If you listen to some investing pundits, you might think index investing and actively managed investing are incompatible opposites. We at Vanguard don’t see it that way.
To us, it’s not index versus active. In fact, depending on your goals, it could well be index and active.
Vanguard is known as a pioneer in index investing. In 1976, we opened the first index mutual fund, giving shareholders an opportunity to track the performance of the S&P 500 Index. But our roots in active management—which aims to choose investments that will outperform the market—go back to the 1929 launch of what later became Vanguard Wellington™ Fund.
Our index and active funds share important traits. Both are low-cost, and as their assets grow, we can take advantage of economies of scale by further reducing fund expense ratios. That allows you to keep more of your fund’s returns.
But low costs aren’t the whole story. Talent and experience are vital regardless of a fund’s management style.
6
When it comes to indexing, portfolio managers in our Equity Index Group and Fixed Income Group have honed their expertise over decades. That expertise helps our index funds meet their objectives of closely tracking their benchmarks.
Our active funds also benefit from world-class managers—both our own experts and those we hire from around the globe. There’s no guarantee that active management will lead to market-beating results, but the combination of talent and low costs can give investors a better chance of success.
If you’d like to know more, see Keys to Improving the Odds of Active Management Success and The Case for Index-Fund Investing, available at vanguard.com/research.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 17, 2016
7
Advisors’ Report
For the six months ended April 30, 2016, Vanguard Emerging Markets Select Stock Fund returned 2.07%. The average return of its peers was –0.22%, and its benchmark, the FTSE Emerging Index, returned 0.87%.
The fund’s assets are divided among four independent investment advisors. The use of multiple advisors provides exposure to distinct yet complementary investment approaches, enhancing the diversification of your fund. It is not uncommon for
different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the accompanying table. The advisors have also prepared a discussion of the investment environment that existed during the fiscal half year and of how their portfolio positioning reflects this assessment. These comments were prepared on May 23, 2016.
Vanguard Emerging Markets Select Stock Fund Investment Advisors | ||||
Fund Assets Managed | ||||
Investment Advisor | % | $ Million | Investment Strategy | |
M&G Investment Management | 24 | 65 | Seeks to identify companies that can handle capital | |
Limited | with discipline, generate returns above the cost of | |||
capital, and stay focused on creating value. M&G | ||||
attempts to take advantage of pricing deviations | ||||
created by short-term investors. | ||||
Wellington Management | 24 | 65 | Allocates the assets in its portion of the fund to a team | |
Company LLP | of global analysts who seek to add value through | |||
in-depth fundamental research and understanding of | ||||
their industries. By covering the same companies over | ||||
a period of many years, these investment professionals | ||||
gain comprehensive insight to guide decisions for their | ||||
subportfolios. | ||||
Oaktree Capital Management, L.P. | 24 | 64 | Seeks securities that have been undervalued by | |
investors. Oaktree’s investment process is driven by | ||||
bottom-up research, which includes extensive travel to | ||||
meet company management and maintaining in-house | ||||
models focused on deriving reliable cash-flow | ||||
projections. | ||||
Pzena Investment Management, | 24 | 64 | Uses a deep-value approach that focuses on the most | |
LLC | undervalued companies based on price-to-normalized | |||
earnings. The firm believes that this value philosophy | ||||
works well globally and is especially effective in | ||||
emerging markets because of generally wider valuation | ||||
spreads. | ||||
Cash Investments | 4 | 12 | These short-term reserves are invested by Vanguard in | |
equity index products to simulate investment in stocks. | ||||
Each advisor may also maintain a modest cash | ||||
position. |
8
Wellington Management Company llp
Portfolio Managers:
Cheryl M. Duckworth, CFA,
Senior Managing Director and
Associate Director,
Global Industry Research
Mark Mandel, CFA,
Senior Managing Director and
Director, Global Industry Research
Our portion of the fund focuses on bottom-up stock selection as the primary driver of performance while minimizing active industry bets.
Emerging-market equities rose modestly in U.S. dollar terms as measured by the FTSE Emerging Index during the six-month period. Materials, energy, and consumer staples led, while health care, industrials, and telecommunication services were the weakest.
Positive stock selection in financials, energy, information technology, and industrials drove relative performance.
BM&F Bovespa, a Brazilian stock and derivatives exchange; Sberbank, a Russian lending institution and commercial bank; and Petron, a Philippines-based oil refiner, were the top relative contributors.
BM&F Bovespa’s stock moved higher as market sentiment on Brazil improved significantly. The stock also benefited from the potential acquisition of clearing house Cetip. The deal, which has not yet been finalized, would strengthen BM&F Bovespa’s competitiveness in the market and give it greater earnings visibility. The new entity would also provide more resilience to revenues, as trading volumes regularly cause volatility.
Sberbank has undergone a multiyear earnings recovery. The bank’s ability to drive down costs and deliver higher net interest margins has benefited the share price.
Shares in Petron rose during the period as the market reacted positively to increasing profitability and use of cash to de-lever the balance sheet. We trimmed the position on strength.
Weak security selection in materials and consumer discretionary partially offset the portfolio’s positive relative performance.
Total Access Communication, a Thai mobile provider, and ICICI Bank, an Indian multinational banking and financial services provider, were among the top detractors.
Shares of Total Access Communication fell after the company fared poorly during Thailand’s auction of 4G mobile spectrum licenses in December, hurting its competitive position in the industry. We eliminated the holding.
ICICI Bank has been troubled lately because of its pool of distressed loans. We feel that these problem loans are concentrated in a few corporate groups while the rest of the
9
business remains solid. We continue to hold the stock, as we believe this is a cyclical issue overshadowing the expansion of the profitable franchise.
Oaktree Capital Management, L.P.
Portfolio Managers:
Frank J. Carroll III,
Managing Director and Co-Head of
Emerging Markets Equities
Timothy D. Jensen,
Managing Director and Co-Head of
Emerging Markets Equities
Emerging markets traded within a wide range during the six months ended April 30, 2016. In spite of volatile currency and commodity prices, continued uncertainty in China, and equity outflows from emerging markets, the index generated a small gain.
Following a sharp 25% rise from mid-2014 to a peak in late January 2016, the dollar reversed course and depreciated 6% by April 30. Dollar weakness relieved pressure on emerging-market currencies, which appreciated slightly after several years of persistent weakness.
Commodity prices, particularly oil and iron ore, plunged but then partially or fully recovered. These price swings had a notable impact on energy and materials stocks and on markets dependent on commodity exports.
China remained at the forefront of emerging markets’ headlines, triggering the massive global sell-off that occurred in early January. Since the January bottom, the Chinese government has improved communications with the market, the yuan has recovered from its January weakness, and the economy is accelerating.
After five difficult years, the Brazilian equity market was one of the leading performers, driven by the prospect of political change and the potential for subsequent economic reform.
Emerging-market equity funds continued to experience net outflows; without inflows, capital continues to shift quickly from one market to another.
Weak stock selection in Brazil and China detracted from performance, while selection in Mexico and South Africa helped. By sector, consumer discretionary, consumer staples, information technology, and energy detracted from relative performance, while materials and financials contributed to results.
At the end of the period, the portfolio had overweight allocations to China and Russia, a non-index exposure to South Korea, and underweight allocations to Taiwan, Malaysia, and South Africa.
10
M&G Investment
Management Limited
Portfolio Manager:
Matthew Vaight, UKSIP
Emerging-market share prices were volatile during the six months. Steep falls at the beginning of the period were followed by a sharp rebound as concerns about China’s economy receded and commodity prices rallied.
Brazil was one of the best-performing markets during the period, driven by recovering commodity prices and expectations of political change. Investors were optimistic that a new government would be better able to address the country’s economic problems. Against this backdrop, several of our Brazilian holdings rallied, most notably homebuilder MRV Engen-haria and financial group Banco Bradesco. After impressive share price gains, we took some profits and reduced these positions.
A number of the portfolio’s other notable successes were boosted by gains in commodity prices toward the end of the period. Sberbank, a Russian lender, benefited from increased confidence about the Russian economy as the price of oil rose. Tullow Oil, an Africa-focused oil explorer, and First Quantum Minerals, a Canada-listed copper miner, also contributed to results.
In contrast, several Chinese holdings weighed on performance as China’s stock market retreated after peaking in 2015. China Lesso, a plastic-pipe firm, and China Power Resources, a power producer, were the leading detractors. The position in Standard Chartered, a U.K.-based bank focused on emerging markets, also hurt performance, as its profits were hit by rising bad loans and restructuring costs.
We are finding attractively valued opportunities in North Asia, particularly in Taiwan and South Korea, where we believe companies have suffered excessively from concerns about China’s slowing economy. During the period, we invested in a number of innovative Taiwanese technology firms, including Catcher Technology, which makes mobile-phone casings. We also took advantage of share price weakness to start a position in Baidu, China’s leading internet search company.
Pzena Investment Management, LLC
Portfolio Managers:
Caroline Cai, CFA, Principal
Allison Fisch, Principal
John P. Goetz, Managing Principal
and Co-Chief Investment Officer
Heading into the end of 2015 and early 2016, the markets dropped sharply, driven by a decline in energy prices and fears of a collapse in emerging markets. Emerging
11
markets were down significantly from November through January but quickly reversed, with the FTSE Emerging Index finishing with a modestly positive return for the six months ended April 30. Our strong stock selection in the telecommunication services and energy sectors was partially offset by weakness in financials, information technology, and consumer staples.
The largest contributors were POSCO, a South Korean steel maker; Sabesp, a Brazilian water and waste management company; and Rosneft, a Russian oil company. Improving commodity prices helped drive POSCO’s share price higher. Sabesp gained on improving reservoir levels after a severe drought and has succeeded in staying within its debt covenants despite challenging operating conditions. Rosneft also was up, driven by the continued dramatic rebound in oil prices.
The top detractor was industrial holding Pacific Basin Shipping in Hong Kong, which was hurt by unprecedented weakness in dry-bulk freight prices. We expect prices to rise as ship scrappage increases and demand growth absorbs excess supply. In utilities, China Power International detracted, but we believe it has a compelling valuation despite concerns about weak power volumes and price regulation. In consumer discretionary, Dongfeng Motor Group in China fell as its commercial vehicle sales slowed, reflecting weaker demand than expected.
The portfolio’s largest allocations are in financials, information technology, and consumer discretionary, and its smallest weights are in health care and consumer staples. Although the cycle has taken longer than normal, we believe the ability of value to deliver excess returns remains intact.
12
Emerging Markets Select Stock Fund
Fund Profile
As of April 30, 2016
Portfolio Characteristics | |||
MSCI | |||
AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Number of Stocks | 268 | 957 | 1,847 |
Median Market Cap | $12.1B | $15.7B | $28.4B |
Price/Earnings Ratio | 16.8x | 17.5x | 18.6x |
Price/Book Ratio | 1.3x | 1.6x | 1.5x |
Return on Equity | 16.1% | 17.5% | 15.0% |
Earnings Growth | |||
Rate | 7.8% | 9.6% | 7.4% |
Dividend Yield | 2.4% | 2.9% | 3.2% |
Turnover Rate | |||
(Annualized) | 49% | — | — |
Ticker Symbol | VMMSX | — | — |
Expense Ratio1 | 0.93% | — | — |
Short-Term Reserves | 1.9% | — | — |
Sector Diversification (% of equity exposure) | |||
MSCI | |||
AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Consumer Discretionary | 10.7% | 8.6% | 11.6% |
Consumer Staples | 5.0 | 8.2 | 11.0 |
Energy | 11.5 | 9.6 | 6.7 |
Financials | 26.7 | 30.1 | 25.9 |
Health Care | 1.4 | 2.8 | 9.0 |
Industrials | 5.4 | 7.1 | 11.5 |
Information Technology | 19.1 | 14.5 | 8.0 |
Materials | 9.1 | 7.6 | 7.4 |
Telecommunication | |||
Services | 5.7 | 7.6 | 5.3 |
Utilities | 5.4 | 3.9 | 3.6 |
Volatility Measures | ||
MSCI AC | ||
FTSE | World | |
Emerging | Index | |
Index | ex USA | |
R-Squared | 0.97 | 0.83 |
Beta | 1.02 | 1.18 |
These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months. | ||
Ten Largest Holdings (% of total net assets) | ||
Taiwan Semiconductor | ||
Manufacturing Co. Ltd. | Semiconductors | 4.1% |
Tencent Holdings Ltd. | Internet Software & | |
Services | 1.8 | |
Ambev SA | Brewers | 1.8 |
Sberbank of Russia | ||
PJSC | Diversified Banks | 1.7 |
Lukoil PJSC | Integrated Oil & Gas | 1.5 |
China Mobile Ltd. | Wireless | |
Telecommunication | ||
Services | 1.4 | |
China Construction Bank | ||
Corp. | Diversified Banks | 1.3 |
Sasol Ltd. | Integrated Oil & Gas | 1.3 |
Naspers Ltd. | Cable & Satellite | 1.2 |
OTP Bank plc | Diversified Banks | 1.2 |
Top Ten | 17.3% | |
The holdings listed exclude any temporary cash investments and equity index products. | ||
Allocation by Region (% of equity exposure)
1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2016, the annualized expense ratio was 0.91%.
13
Emerging Markets Select Stock Fund
Market Diversification (% of equity exposure) | |||
MSCI AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Europe | |||
United Kingdom | 2.1% | 0.0% | 13.9% |
Other | 1.7 | 0.5 | 31.9 |
Subtotal | 3.8% | 0.5% | 45.8% |
Pacific | |||
South Korea | 7.1% | 0.0% | 3.3% |
Hong Kong | 2.9 | 0.0 | 2.4 |
Other | 0.6 | 0.0 | 22.5 |
Subtotal | 10.6% | 0.0% | 28.2% |
Emerging Markets | |||
China | 21.6% | 25.3% | 4.4% |
Taiwan | 11.3 | 13.8 | 2.5 |
Brazil | 10.3 | 8.7 | 1.6 |
India | 9.5 | 12.1 | 1.7 |
Russia | 7.0 | 4.9 | 0.8 |
South Africa | 5.4 | 9.4 | 1.6 |
Thailand | 2.1 | 2.7 | 0.4 |
Mexico | 2.1 | 5.6 | 1.0 |
Indonesia | 1.8 | 2.6 | 0.5 |
Hungary | 1.6 | 0.4 | 0.1 |
Turkey | 1.4 | 1.9 | 0.3 |
Philippines | 1.3 | 1.8 | 0.3 |
Other | 4.7 | 10.3 | 1.6 |
Subtotal | 80.1% | 99.5% | 16.8% |
North America | |||
United States | 5.0% | 0.0% | 0.2% |
Other | 0.3 | 0.0 | 6.9 |
Subtotal | 5.3% | 0.0% | 7.1% |
Middle East | 0.0% | 0.0% | 0.5% |
Other | 0.2% | 0.0% | 1.6% |
14
Emerging Markets Select Stock 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.
Fiscal-Year Total Returns (%): June 27, 2011, Through April 30, 2016
Average Annual Total Returns: Periods Ended March 31, 2016
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period.
Securities and Exchange Commission rules require that we provide this information.
Inception | One | Since | |
Date | Year | Inception | |
Emerging Markets Select Stock Fund | 6/27/2011 | -11.32% | -3.16% |
See Financial Highlights for dividend and capital gains information.
15
Emerging Markets Select Stock Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2016
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks (94.5%)1 | |||
Brazil (9.8%) | |||
Ambev SA | 652,381 | 3,678 | |
Telefonica Brasil SA ADR | 185,154 | 2,281 | |
Cia de Saneamento | |||
Basico do Estado de Sao | |||
Paulo | 249,800 | 1,918 | |
* | Petroleo Brasileiro SA | ||
Preference Shares | 587,500 | 1,748 | |
Itau Unibanco Holding | |||
SA ADR | 178,532 | 1,701 | |
Banco Bradesco SA | |||
Preference Shares | 198,626 | 1,496 | |
MRV Engenharia e | |||
Participacoes SA | 349,465 | 1,223 | |
BM&FBovespa SA - Bolsa | |||
de Valores Mercadorias | |||
e Futuros | 226,300 | 1,130 | |
Ambev SA ADR | 190,400 | 1,064 | |
Vale SA Class B ADR | 224,500 | 1,019 | |
EDP - Energias do Brasil | |||
SA | 251,904 | 938 | |
Qualicorp SA | 189,000 | 819 | |
* | Usinas Siderurgicas de | ||
Minas Gerais SA | |||
Preference Shares | 1,009,400 | 734 | |
* | Randon Participacoes SA | ||
Preference Shares | 842,718 | 698 | |
Telefonica Brasil SA | |||
Preference Shares | 56,600 | 697 | |
BB Seguridade | |||
Participacoes SA | 75,655 | 660 | |
TOTVS SA | 78,444 | 643 | |
Braskem SA Preference | |||
Shares | 71,100 | 508 | |
Gerdau SA ADR | 195,006 | 435 | |
Cyrela Brazil Realty SA | |||
Empreendimentos e | |||
Participacoes | 141,255 | 422 |
Market | |||
Value• | |||
Shares | ($000) | ||
* | B2W Cia Digital | 103,451 | 412 |
Itau Unibanco Holding SA | |||
Preference Shares | 42,394 | 405 | |
^ | Vale SA Class B ADR | 68,222 | 387 |
Cia de Saneamento de | |||
Minas Gerais-COPASA | 46,750 | 292 | |
Banco do Estado do Rio | |||
Grande do Sul SA | |||
Preference Shares | 104,500 | 259 | |
Lojas Renner SA | 37,900 | 229 | |
Multiplan Empreendimentos | |||
Imobiliarios SA | 12,500 | 214 | |
Raia Drogasil SA | 11,200 | 179 | |
Kroton Educacional SA | 29,100 | 108 | |
Brasil Insurance | |||
Participacoes e | |||
Administracao SA | 8,252 | 56 | |
* | Randon Participacoes SA | ||
Preference Shares Rights | |||
Exp. 05/12/2016 | 6 | — | |
26,353 | |||
Canada (0.3%) | |||
First Quantum Minerals Ltd. 101,530 | 865 | ||
Chile (0.3%) | |||
Banco Santander Chile ADR 26,375 | 512 | ||
Enersis Americas SA ADR | 21,756 | 186 | |
698 | |||
China (20.0%) | |||
Tencent Holdings Ltd. | 234,485 | 4,771 | |
China Mobile Ltd. | 321,800 | 3,694 | |
China Construction | |||
Bank Corp. | 5,686,250 | 3,611 | |
Industrial & Commercial | |||
Bank of China Ltd. | 4,956,380 | 2,654 | |
China Shenhua Energy | |||
Co. Ltd. | 1,517,500 | 2,555 | |
Greatview Aseptic | |||
Packaging Co. Ltd. | 4,935,000 | 2,499 |
16
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Dongfeng Motor Group | |||
Co. Ltd. | 2,117,000 | 2,313 | |
Lenovo Group Ltd. | 2,617,780 | 2,071 | |
CNOOC Ltd. | 1,533,400 | 1,894 | |
China Overseas Land & | |||
Investment Ltd. | 570,170 | 1,810 | |
China Pacific Insurance | |||
Group Co. Ltd. | 485,012 | 1,701 | |
China Unicom Hong | |||
Kong Ltd. | 1,399,973 | 1,638 | |
PetroChina Co. Ltd. | 1,980,000 | 1,449 | |
China Power International | |||
Development Ltd. | 3,158,600 | 1,348 | |
* | China Agri-Industries | ||
Holdings Ltd. | 3,934,000 | 1,348 | |
PICC Property & Casualty | |||
Co. Ltd. | 732,040 | 1,332 | |
China Life Insurance Co. | |||
Ltd. | 553,216 | 1,274 | |
China Longyuan Power | |||
Group Corp. Ltd. | 1,682,580 | 1,164 | |
China Resources Power | |||
Holdings Co. Ltd. | 673,683 | 1,135 | |
China Lesso Group | |||
Holdings Ltd. | 1,945,000 | 1,069 | |
Far East Horizon Ltd. | 1,287,000 | 1,022 | |
Baoxin Auto Group Ltd. | 1,325,000 | 838 | |
China Shineway | |||
Pharmaceutical Group | |||
Ltd. | 676,000 | 773 | |
Anhui Conch Cement Co. | |||
Ltd. | 285,500 | 752 | |
China Everbright | |||
International Ltd. | 611,500 | 685 | |
Brilliance China | |||
Automotive Holdings Ltd. | 658,000 | 649 | |
China Dongxiang Group | |||
Co. Ltd. | 3,074,000 | 633 | |
*,2 | Tianhe Chemicals | ||
Group Ltd. | 4,142,000 | 625 | |
Kingboard Laminates | |||
Holdings Ltd. | 1,155,125 | 590 | |
China Cinda Asset | �� | ||
Management Co. Ltd. | 1,794,500 | 588 | |
Haier Electronics Group | |||
Co. Ltd. | 341,241 | 573 | |
* | Sinopec Shanghai | ||
Petrochemical Co. Ltd. | 1,020,000 | 500 | |
Guangdong Investment | |||
Ltd. | 352,388 | 498 | |
China Shipping | |||
Development Co. Ltd. | 660,000 | 469 | |
GCL-Poly Energy Holdings | |||
Ltd. | 2,912,000 | 434 |
Market | |||
Value• | |||
Shares | ($000) | ||
Dah Chong Hong Holdings | |||
Ltd. | 1,037,000 | 429 | |
ENN Energy Holdings Ltd. | 87,887 | 429 | |
China ZhengTong Auto | |||
Services Holdings Ltd. | 1,041,000 | 425 | |
Sunny Optical Technology | |||
Group Co. Ltd. | 119,700 | 369 | |
* | CNOOC Ltd. ADR | 2,900 | 358 |
* | Hutchison China | ||
MediTech Ltd. ADR | 21,737 | 285 | |
ANTA Sports Products Ltd. | 104,780 | 267 | |
* | Li Ning Co. Ltd. | 490,705 | 213 |
Fosun International Ltd. | 127,831 | 177 | |
* | Best Pacific International | ||
Holdings Ltd. | 156,000 | 93 | |
Longfor Properties Co. Ltd. | 43,349 | 61 | |
54,065 | |||
Colombia (0.1%) | |||
Cementos Argos SA | 99,515 | 404 | |
Czech Republic (0.2%) | |||
Komercni banka as | 2,878 | 592 | |
Egypt (0.4%) | |||
Commercial International | |||
Bank Egypt SAE | 202,898 | 1,032 | |
Greece (0.5%) | |||
Hellenic | |||
Telecommunications | |||
Organization SA | 68,973 | 671 | |
Motor Oil Hellas Corinth | |||
Refineries SA | 55,699 | 636 | |
1,307 | |||
Hong Kong (2.8%) | |||
AIA Group Ltd. | 444,318 | 2,659 | |
AMVIG Holdings Ltd. | 3,170,000 | 1,305 | |
Galaxy Entertainment | |||
Group Ltd. | 252,000 | 847 | |
* | Pacific Basin Shipping Ltd. | 4,394,750 | 741 |
Stella International | |||
Holdings Ltd. | 255,500 | 645 | |
Sands China Ltd. | 159,250 | 567 | |
Texwinca Holdings Ltd. | 559,000 | 544 | |
MGM China Holdings Ltd. | 159,797 | 224 | |
* | Cowell e Holdings Inc. | 277,818 | 109 |
AAC Technologies | |||
Holdings Inc. | 6,700 | 46 | |
7,687 | |||
Hungary (1.5%) | |||
OTP Bank plc | 119,259 | 3,160 | |
* | Magyar Telekom | ||
Telecommunications plc | 556,900 | 967 | |
4,127 |
17
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
India (8.9%) | |||
Reliance Industries Ltd. | 194,686 | 2,878 | |
Axis Bank Ltd. | 360,734 | 2,563 | |
CESC Ltd. | 203,018 | 1,643 | |
Tata Consultancy Services | |||
Ltd. | 38,594 | 1,474 | |
Hindalco Industries Ltd. | 984,825 | 1,429 | |
State Bank of India | 492,338 | 1,399 | |
ICICI Bank Ltd. ADR | 179,891 | 1,268 | |
NTPC Ltd. | 531,526 | 1,114 | |
ICICI Bank Ltd. | 306,676 | 1,084 | |
UltraTech Cement Ltd. | 21,620 | 1,029 | |
Bharti Airtel Ltd. | 181,056 | 990 | |
Bharti Infratel Ltd. | 157,323 | 887 | |
Bank of Baroda | 356,094 | 845 | |
Larsen & Toubro Ltd. | 41,625 | 786 | |
NHPC Ltd. | 2,157,750 | 671 | |
Aurobindo Pharma Ltd. | 56,721 | 649 | |
Godrej Consumer | |||
Products Ltd. | 29,663 | 590 | |
Power Grid Corp. of India | |||
Ltd. | 271,901 | 586 | |
Marico Ltd. | 104,525 | 408 | |
HDFC Bank Ltd. ADR | 5,660 | 356 | |
ITC Ltd. | 65,962 | 323 | |
Bharat Electronics Ltd. | 13,992 | 249 | |
* | IDFC Bank Ltd. | 302,772 | 217 |
IDFC Ltd. | 302,772 | 203 | |
Punjab National Bank | 154,375 | 202 | |
Lupin Ltd. | 5,336 | 129 | |
Union Bank of India | 52,451 | 100 | |
Grasim Industries Ltd. | 1,526 | 94 | |
24,166 | |||
Indonesia (1.6%) | |||
Bank Rakyat Indonesia | |||
Persero Tbk PT | 1,624,700 | 1,270 | |
* | Telekomunikasi Indonesia | ||
Persero Tbk PT | 3,376,200 | 906 | |
* | Hanjaya Mandala | ||
Sampoerna Tbk PT | 75,000 | 567 | |
Bank Central Asia Tbk PT | 552,200 | 545 | |
* | Bank Tabungan Pensiunan | ||
Nasional Tbk PT | 2,469,800 | 501 | |
Pakuwon Jati Tbk PT | 8,410,900 | 333 | |
Matahari Department | |||
Store Tbk PT | 146,800 | 211 | |
4,333 | |||
Kenya (0.1%) | |||
Safaricom Ltd. | 2,328,200 | 394 | |
Malaysia (0.8%) | |||
Genting Malaysia Bhd. | 1,438,900 | 1,644 | |
Heineken Malaysia Bhd. | 68,400 | 263 | |
Inari Amertron Bhd. | 205,550 | 144 | |
2,051 |
Market | |||
Value• | |||
Shares | ($000) | ||
Mexico (1.9%) | |||
* | Cemex SAB de CV ADR | 179,354 | 1,336 |
Grupo Financiero Banorte | |||
SAB de CV | 208,400 | 1,183 | |
Grupo Mexico SAB de CV | |||
Class B | 332,800 | 847 | |
Grupo Financiero | |||
Santander Mexico SAB | |||
de CV ADR | 84,271 | 770 | |
Wal-Mart de Mexico SAB | |||
de CV | 185,200 | 458 | |
Unifin Financiera SAB de | |||
CV SOFOM ENR | 94,700 | 279 | |
Grupo Comercial Chedraui | |||
SA de CV | 47,641 | 135 | |
5,008 | |||
Other (1.0%) | |||
3 | Vanguard FTSE Emerging | ||
Markets ETF | 77,198 | 2,696 | |
Pakistan (0.4%) | |||
United Bank Ltd. | 630,300 | 986 | |
Peru (0.5%) | |||
Credicorp Ltd. | 9,086 | 1,324 | |
Philippines (1.2%) | |||
Energy Development | |||
Corp. | 11,738,493 | 1,475 | |
Metropolitan Bank & | |||
Trust Co. | 653,743 | 1,132 | |
Universal Robina Corp. | 80,680 | 358 | |
Petron Corp. | 1,016,400 | 231 | |
Puregold Price Club Inc. | 191,500 | 164 | |
3,360 | |||
Poland (0.5%) | |||
* | Cyfrowy Polsat SA | 192,000 | 1,222 |
Qatar (0.2%) | |||
Industries Qatar QSC | 16,691 | 480 | |
Romania (0.1%) | |||
2 | Electrica SA GDR | 22,563 | 261 |
Russia (6.7%) | |||
Lukoil PJSC ADR | 92,971 | 3,961 | |
Gazprom PAO ADR | 565,350 | 2,938 | |
Rosneft OAO GDR | 458,839 | 2,518 | |
Sberbank of Russia PJSC | |||
ADR (London Shares) | 289,506 | 2,328 | |
Sberbank of Russia PJSC | 698,964 | 1,334 | |
MMC Norilsk Nickel PJSC | |||
ADR | 69,043 | 1,020 | |
Sberbank of Russia PJSC | |||
ADR | 122,978 | 986 |
18
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Moscow Exchange | |||
MICEX-RTS PJSC | 567,316 | 896 | |
PhosAgro OAO GDR | 54,302 | 842 | |
Gazprom Neft PAO ADR | 42,000 | 498 | |
O’Key Group SA GDR | 181,201 | 418 | |
Etalon Group Ltd. GDR | 150,377 | 343 | |
18,082 | |||
Singapore (0.6%) | |||
Wilmar International Ltd. | 314,400 | 863 | |
* | Ezion Holdings Ltd. | 1,743,500 | 709 |
* | Ezion Holdings Ltd | ||
Warrants Exp. | |||
04/15/2020 | 334,380 | 40 | |
1,612 | |||
South Africa (4.9%) | |||
Sasol Ltd. | 105,396 | 3,448 | |
Naspers Ltd. | 24,119 | 3,319 | |
Imperial Holdings Ltd. | 141,582 | 1,479 | |
Barloworld Ltd. | 232,133 | 1,340 | |
Reunert Ltd. | 247,638 | 1,245 | |
* | AngloGold Ashanti Ltd. | ||
ADR | 53,300 | 877 | |
Discovery Ltd. | 63,432 | 568 | |
* | Steinhoff International | ||
Holdings NV | 50,587 | 316 | |
Woolworths Holdings Ltd. | 40,049 | 258 | |
* | Aveng Ltd. | 511,216 | 166 |
Gold Fields Ltd. | 29,342 | 136 | |
Pick n Pay Stores Ltd. | 15,868 | 82 | |
* | Adcock Ingram Holdings | ||
Ltd. Warrants | |||
Exp. 7/26/2019 | 1 | — | |
13,234 | |||
South Korea (6.4%) | |||
Samsung Electronics Co. | |||
Ltd. | 2,673 | 2,913 | |
POSCO | 10,553 | 2,211 | |
SK Hynix Inc. | 86,349 | 2,118 | |
Hana Financial Group Inc. | 76,338 | 1,712 | |
* | Hyundai Heavy Industries | ||
Co. Ltd. | 15,045 | 1,522 | |
Hyundai Motor Co. | 11,355 | 1,425 | |
Dongbu Insurance Co. Ltd. | 17,400 | 1,067 | |
KB Financial Group Inc. | 32,070 | 981 | |
Kia Motors Corp. | 17,958 | 753 | |
LG Electronics Inc. | 12,775 | 650 | |
LG Chem Ltd. | 2,329 | 604 | |
Shinhan Financial Group | |||
Co. Ltd. | 16,370 | 600 | |
Samsung Life Insurance | |||
Co. Ltd. | 6,057 | 581 | |
LG Chem Ltd. Preference | |||
Shares | 1,016 | 176 | |
17,313 |
Market | |||
Value• | |||
Shares | ($000) | ||
Spain (0.6%) | |||
Prosegur Cia de | |||
Seguridad SA | 268,398 | 1,555 | |
Sweden (0.1%) | |||
* | Vostok Emerging Finance | ||
Ltd. | 2,240,901 | 301 | |
Switzerland (0.5%) | |||
* | Dufry AG | 10,291 | 1,357 |
Taiwan (10.5%) | |||
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | |||
ADR | 273,117 | 6,443 | |
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | 992,243 | 4,559 | |
Delta Electronics Inc. | 585,244 | 2,711 | |
Compal Electronics Inc. | 3,251,000 | 1,908 | |
Chicony Electronics Co. | |||
Ltd. | 596,964 | 1,430 | |
Hon Hai Precision | |||
Industry Co. Ltd. | 571,098 | 1,360 | |
Globalwafers Co. Ltd. | 518,459 | 1,187 | |
Teco Electric and | |||
Machinery Co. Ltd. | 1,347,000 | 1,062 | |
Casetek Holdings Ltd. | 210,000 | 943 | |
Catcher Technology Co. | |||
Ltd. | 126,615 | 886 | |
eMemory Technology Inc. | 78,100 | 854 | |
Mega Financial Holding | |||
Co. Ltd. | 1,089,182 | 772 | |
Hermes Microvision Inc. | 25,000 | 766 | |
Airtac International Group | 91,315 | 603 | |
Yuanta Financial Holding | |||
Co. Ltd. | 1,690,165 | 556 | |
Largan Precision Co. Ltd. | 5,205 | 363 | |
* | China Airlines Ltd. | 1,042,000 | 340 |
Tung Thih Electronic Co. | |||
Ltd. | 13,145 | 234 | |
Silergy Corp. | 14,388 | 191 | |
President Chain Store | |||
Corp. | 26,700 | 189 | |
Advantech Co. Ltd. | 24,038 | 169 | |
Silicon Motion | |||
Technology Corp. ADR | 3,728 | 144 | |
Hota Industrial | |||
Manufacturing Co. Ltd. | 29,000 | 139 | |
* | Bizlink Holding Inc. | 22,000 | 125 |
Parade Technologies Ltd. | 13,000 | 120 | |
* | Land Mark Optoelectronics | ||
Corp. | 8,000 | 117 | |
Voltronic Power Technology | |||
Corp. | 7,000 | 110 | |
Poya International Co. Ltd. | 8,080 | 86 | |
28,367 |
19
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Thailand (2.0%) | |||
Bangkok Bank PCL | 400,000 | 1,875 | |
* | Krung Thai Bank PCL | ||
(Foreign) | 2,232,275 | 1,115 | |
Kasikornbank PCL | 171,500 | 813 | |
PTT Global Chemical PCL | 358,344 | 639 | |
Tesco Lotus Retail | |||
Growth Freehold & | |||
Leasehold Property Fund | 994,400 | 481 | |
CP ALL PCL (Foreign) | 113,800 | 149 | |
Delta Electronics Thailand | |||
PCL | 62,300 | 128 | |
KCE Electronics PCL | 47,100 | 106 | |
5,306 | |||
Turkey (1.3%) | |||
Akbank TAS | 513,625 | 1,578 | |
Turkiye Halk Bankasi AS | 275,356 | 1,057 | |
Tupras Turkiye Petrol | |||
Rafinerileri AS | 27,555 | 727 | |
Ulker Biskuvi Sanayi AS | 19,564 | 156 | |
3,518 | |||
United Arab Emirates (0.8%) | |||
Union National Bank PJSC | 1,201,512 | 1,164 | |
* | Dubai Parks & Resorts | ||
PJSC | 1,750,152 | 631 | |
Dubai Financial Market | |||
PJSC | 999,214 | 411 | |
2,206 | |||
United Kingdom (2.1%) | |||
Standard Chartered plc | 130,057 | 1,061 | |
* | Tullow Oil plc | 218,865 | 899 |
Antofagasta plc | 111,925 | 793 | |
Petrofac Ltd. | 55,068 | 682 | |
SABMiller plc | 10,751 | 659 | |
Hikma Pharmaceuticals plc | 15,665 | 505 | |
* | Ophir Energy plc | 446,028 | 493 |
Standard Chartered plc | 56,027 | 453 | |
Coca-Cola HBC AG | 6,840 | 140 | |
5,685 | |||
United States (4.9%) | |||
* | Baidu Inc. ADR | 11,775 | 2,288 |
* | Hollysys Automation | ||
Technologies Ltd. | 82,396 | 1,580 | |
* | Flextronics International | ||
Ltd. | 102,750 | 1,248 | |
Southern Copper Corp. | 36,892 | 1,095 | |
* | Trina Solar Ltd. ADR | 111,700 | 1,089 |
Millicom International | |||
Cellular SA | 18,695 | 1,082 |
Market | |||
Value• | |||
Shares | ($000) | ||
Cosan Ltd. | 164,638 | 886 | |
* | JD.com Inc. ADR | 33,371 | 853 |
* | Genpact Ltd. | 30,400 | 848 |
* | Cognizant Technology | ||
Solutions Corp. Class A | 12,275 | 716 | |
* | Ctrip.com International | ||
Ltd. ADR | 13,203 | 576 | |
* | MakeMyTrip Ltd. | 12,729 | 234 |
* | Alibaba Group Holding | ||
Ltd. ADR | 1,957 | 151 | |
* | Enersis Chile SA ADR | 21,756 | 139 |
* | 58.com Inc. ADR | 2,370 | 129 |
* | Sinovac Biotech Ltd. | 19,478 | 123 |
* | Himax Technologies Inc. | ||
ADR | 11,304 | 117 | |
* | Vipshop Holdings Ltd. ADR | 4,418 | 60 |
13,214 | |||
Total Common Stocks | |||
(Cost $275,265) | 255,161 | ||
Temporary Cash Investments (5.6%)1 | |||
Money Market Fund (5.1%) | |||
4,5 | Vanguard Market | ||
Liquidity Fund, 0.495% 13,680,885 | 13,681 | ||
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (0.5%) | |||
6,7 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.352%, 7/6/16 | 100 | 100 | |
6,7 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.350%, 7/8/16 | 400 | 400 | |
6 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.371%, 9/13/16 | 500 | 499 | |
6 | Federal Home Loan Bank | ||
Discount Notes, | |||
0.465%, 10/28/16 | 500 | 499 | |
1,498 | |||
Total Temporary Cash Investments | |||
(Cost $15,179) | 15,179 | ||
Total Investments (100.1%) | |||
(Cost $290,444) | 270,340 |
20
Emerging Markets Select Stock Fund
Amount | |
($000) | |
Other Assets and Liabilities (-0.1%) | |
Other Assets | |
Investment in Vanguard | 21 |
Receivables for Investment Securities Sold | 777 |
Receivables for Accrued Income | 422 |
Receivables for Capital Shares Issued | 324 |
Other Assets7 | 1,828 |
Total Other Assets | 3,372 |
Liabilities | |
Payables for Investment Securities | |
Purchased | (2,412) |
Collateral for Securities on Loan | (389) |
Payables to Investment Advisor | (306) |
Payables for Capital Shares Redeemed | (255) |
Payables to Vanguard | (358) |
Other Liabilities | (34) |
Total Liabilities | (3,754) |
Net Assets (100%) | |
Applicable to 16,351,301 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 269,958 |
Net Asset Value Per Share | $16.51 |
At April 30, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 318,766 |
Undistributed Net Investment Income | 127 |
Accumulated Net Realized Losses | (28,903) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | (20,104) |
Futures Contracts | 68 |
Foreign Currencies | 4 |
Net Assets | 269,958 |
• 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 $367,000.
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 98.1% and 2.0%, respectively, of net assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At April 30, 2016, the aggregate value of these securities was $886,000, representing 0.3% of net assets.
3 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Includes $389,000 of collateral received for securities on loan.
6 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
7 Securities with a value of $500,000 and cash of $100,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Emerging Markets Select Stock Fund
Statement of Operations
Six Months Ended | |
April 30, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 1,769 |
Interest2 | 25 |
Securities Lending | 3 |
Total Income | 1,797 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 639 |
Performance Adjustment | (28) |
The Vanguard Group—Note C | |
Management and Administrative | 284 |
Marketing and Distribution | 19 |
Custodian Fees | 123 |
Shareholders’ Reports | 62 |
Total Expenses | 1,099 |
Net Investment Income | 698 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | (16,574) |
Futures Contracts | 169 |
Foreign Currencies | (43) |
Realized Net Gain (Loss) | (16,448) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 20,959 |
Futures Contracts | (479) |
Foreign Currencies | 16 |
Change in Unrealized Appreciation (Depreciation) | 20,496 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 4,746 |
1 Dividends are net of foreign withholding taxes of $185,000. | |
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $18,000, $25,000, and ($130,000), respectively. | |
See accompanying Notes, which are an integral part of the Financial Statements.
22
Emerging Markets Select Stock Fund
Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 698 | 4,481 |
Realized Net Gain (Loss) | (16,448) | (10,370) |
Change in Unrealized Appreciation (Depreciation) | 20,496 | (47,213) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 4,746 | (53,102) |
Distributions | ||
Net Investment Income | (4,421) | (3,870) |
Realized Capital Gain | — | — |
Total Distributions | (4,421) | (3,870) |
Capital Share Transactions | ||
Issued | 58,464 | 86,694 |
Issued in Lieu of Cash Distributions | 4,158 | 3,672 |
Redeemed | (51,910) | (85,487) |
Net Increase (Decrease) from Capital Share Transactions | 10,712 | 4,879 |
Total Increase (Decrease) | 11,037 | (52,093) |
Net Assets | ||
Beginning of Period | 258,921 | 311,014 |
End of Period1 | 269,958 | 258,921 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $127,000 and $3,894,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
23
Emerging Markets Select Stock Fund
Financial Highlights
Six Months | June 14, | |||||
Ended | 20111 to | |||||
Year Ended October 31, | ||||||
For a Share Outstanding | April 30, | Oct. 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 |
Net Asset Value, Beginning of Period | $16.48 | $20.13 | $20.37 | $18.73 | $17.69 | $20.00 |
Investment Operations | ||||||
Net Investment Income | .046 | .290 | .264 | .3032 | .3022 | .079 2 |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments 3 | .268 | (3.685) | (.242) | 1.567 | .764 | (2.389) |
Total from Investment Operations | .314 | (3.395) | .022 | 1.870 | 1.066 | (2.310) |
Distributions | ||||||
Dividends from Net Investment Income | (. 284) | (. 255) | (. 262) | (. 230) | (. 026) | — |
Distributions from Realized Capital Gains | — | — | — | — | — | — |
Total Distributions | (. 284) | (. 255) | (. 262) | (. 230) | (. 026) | — |
Net Asset Value, End of Period | $16.51 | $16.48 | $20.13 | $20.37 | $18.73 | $17.69 |
Total Return4 | 2.07% | -16.99% | 0.15% | 10.04% | 6.04% | -11.55% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $270 | $259 | $311 | $223 | $110 | $48 |
Ratio of Total Expenses to | ||||||
Average Net Assets5 | 0.91% | 0.93% | 0.96% | 0.94% | 0.92% | 0.89%6 |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 0.57% | 1.59% | 1.53% | 1.55% | 1.66% | 1.09%6 |
Portfolio Turnover Rate | 49% | 49% | 54% | 54% | 93% | 18% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized. | ||||||
1 Subscription period for the fund was June 14, 2011, to June 27, 2011, during which time all assets were held in money market instruments. Performance measurement began June 27, 2011, at a net asset value of $20.00. 2 Calculated based on average shares outstanding. 3 Includes increases from redemption fees of $.00, $.00, $.00, $.00, $.00, and $.01. Effective May 23, 2012, the redemption fee was eliminated. 4 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable transaction and account service fees. 5 Includes performance-based investment advisory fee increases (decreases) of (0.02%), 0.00%, 0.04%, 0.02%, 0.01%, and 0.00%. 6 Annualized. | ||||||
See accompanying Notes, which are an integral part of the Financial Statements.
24
Emerging Markets Select Stock Fund
Notes to Financial Statements
Vanguard Emerging Markets Select Stock Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations.
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 acquired over 60 days to maturity 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. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
25
Emerging Markets Select Stock Fund
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values 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 six months ended April 30, 2016, the fund’s average investments in long and short futures contracts represented 3% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.
4. 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 (October 31, 2012–2015), and for the period ended April 30, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled 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 absence 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.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at April 30, 2016, or at any time during the period then ended.
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Emerging Markets Select Stock Fund
8. 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. The investment advisory firms Wellington Management Company LLP, M&G Investment Management Limited, Pzena Investment Management, LLC, and Oaktree Capital Management, L.P., each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fees of Wellington Management Company LLP, M&G Investment Management Limited, Pzena Investment Management, LLC, and Oaktree Capital Management, L.P., are subject to quarterly adjustments based on performance since July 31, 2011, relative to the MSCI Emerging Markets Index for the periods prior to August 1, 2013, and to the current benchmark, FTSE Emerging Index, beginning August 1, 2013.
The benchmark change will be fully phased in by July 2016.
Vanguard manages the cash reserves of the fund as described below.
For the six months ended April 30, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.53% of the fund’s average net assets, before a decrease of $28,000 (0.02%) 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, 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.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2016, the fund had contributed to Vanguard capital in the amount of $21,000, representing 0.01% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 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).
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Emerging Markets Select Stock Fund
The following table summarizes the market value of the fund’s investments as of April 30, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—North and South America | 49,765 | 1,082 | — |
Common Stocks—Other | 10,432 | 192,996 | 886 |
Temporary Cash Investments | 13,681 | 1,498 | — |
Futures Contracts—Liabilities1 | (34) | — | — |
Total | 73,844 | 195,576 | 886 |
1 Represents variation margin on the last day of the reporting period. |
Securities in certain countries may transfer between Level 1 and Level 2 because of differences in stock market closure times that may result from transitions between standard and daylight saving time in those countries and the United States. Based on values on the date of transfer, securities valued at $11,706,000 based on Level 1 inputs were transferred from Level 2 during the fiscal period.
E. At April 30, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
($000) | ||||
Aggregate | ||||
Number of | Settlement | Unrealized | ||
Long (Short) | Value | Appreciation | ||
Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
MSCI Emerging Markets Index | June 2016 | 232 | 9,725 | 68 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
F. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.
During the six months ended April 30, 2016, the fund realized net foreign currency losses of $43,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.
The fund realized gains on the sale of securities that were subject to capital gains tax in certain foreign countries. Capital gains taxes reduce realized gains for financial statement purposes but are treated as an expense for tax purposes. Accordingly, $1,000 of capital gains tax has been reclassified from accumulated net realized losses to undistributed net investment income.
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Emerging Markets Select Stock Fund
At April 30, 2016, the cost of investment securities for tax purposes was $290,543,000. Net unrealized depreciation of investment securities for tax purposes was $20,203,000, consisting of unrealized gains of $23,375,000 on securities that had risen in value since their purchase and $43,578,000 in unrealized losses on securities that had fallen in value since their purchase.
G. During the six months ended April 30, 2016, the fund purchased $63,166,000 of investment securities and sold $57,342,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were:
Six Months Ended | Year Ended | |
April 30, 2016 | October 31, 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 3,821 | 4,783 |
Issued in Lieu of Cash Distributions | 276 | 201 |
Redeemed | (3,455) | (4,724) |
Net Increase (Decrease) in Shares Outstanding | 642 | 260 |
I. Management has determined that no material events or transactions occurred subsequent to April 30, 2016, that would require recognition or disclosure in these financial statements.
29
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.
30
Six Months Ended April 30, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Emerging Markets Select Stock Fund | 10/31/2015 | 4/30/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,020.70 | $4.57 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,020.34 | 4.57 |
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 0.91%. 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 (182/366). | |||
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Trustees Approve Advisory Arrangements
The board of trustees of Vanguard Emerging Markets Select Stock Fund has renewed the fund’s investment advisory arrangements with M&G Investment Management Limited (M&G), Oaktree Capital Management, L.P. (Oaktree), Pzena Investment Management, LLC (Pzena), and Wellington Management Company LLP (Wellington Management). The board determined that renewing the fund’s advisory arrangements was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management since its inception in 2011, and took into account the organizational depth and stability of each advisor. The board considered the following:
M&G. Founded in 1931, M&G is an investment management firm offering a broad range of investment products. M&G employs a long-term, bottom-up approach to portfolio management that seeks to identify companies that can handle capital with discipline, generate returns above the cost of capital, and stay focused on creating value. M&G’s long-term view attempts to take advantage of pricing deviations created by short-term investors. The advisor focuses on four areas in which investors tend to misprice returns: (1) external change, or companies benefiting from long-term structural trends; (2) internal change, or companies that are restructuring and improving capital allocation; (3) asset growth, or companies investing heavily in R&D to support innovation and sustainably high returns; and (4) quality, or companies that are well-managed and have high sustainable returns. M&G has advised a portion of the fund since the fund’s inception.
Oaktree. Founded in 1995, Oaktree is an investment advisory firm that focuses on certain specialized investment areas, including emerging markets. The portfolio managers each have over 20 years of investment experience and are supported by an analyst team focused only on emerging markets equity investing. The team conducts fundamental research on companies with strong cash flow generation and attractive returns on capital, seeking to purchase these companies at favorable valuations. The team emphasizes developing in-depth industry knowledge by traveling extensively to meet with company management. Oaktree has advised a portion of the fund since the fund’s inception.
Pzena. Founded in 1995, Pzena is an independent investment management firm that uses a classic value investment strategy in a range of domestic and international portfolios. The firm employs in-depth fundamental research to identify companies that are temporarily underperforming their long-term earnings power. Companies are purchased when Pzena judges that: (1) the company’s problems are temporary; (2) management has a viable strategy to generate earnings recovery; and (3) there is meaningful downside protection in case the earnings recovery does not materialize. Pzena has advised a portion of the fund since the fund’s inception.
Wellington Management. Founded in 1928, Wellington Management is among the nation’s oldest and most respected institutional investment managers. The portfolio managers allocate the assets in Wellington Management’s portion of the fund to a team of investment professionals who are primarily global industry analysts (GIAs). The relative size of each analyst’s subportfolio is roughly proportional
32
to the weight of the analyst’s coverage universe in the fund’s benchmark. This structure is designed to enable the GIAs to add value through in-depth fundamental research and understanding of their industries. Wellington Management has advised a portion of the fund since the fund’s inception.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangements.
Investment performance
The board considered the performance of the fund and each advisor since the fund’s inception, including any periods of outperformance or underperformance relative to a benchmark index and peer group. The board concluded that the performance was such that the advisory arrangements should continue. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average. Information about the fund’s expenses appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the fund’s advisory fee rate.
The board did not consider profitability of M&G, Oaktree, Pzena, or Wellington Management in determining whether to approve the advisory fees, because the firms are independent of Vanguard, and the advisory fees are the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules for M&G, Oaktree, Pzena, and Wellington Management. The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.
The board will consider whether to renew the advisory arrangements again after a one-year period.
33
Glossary
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
34
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International plc (diversified manufacturing and |
the investment companies served by The Vanguard | services), HP Inc. (printer and personal computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive plc |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at |
President of The Vanguard Group, and of each of | New Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and Other | appointments in the Department of Philosophy, School |
Experience: Executive Chief Staff and Marketing | of Arts and Sciences, and at the Graduate School of |
Officer for North America and Corporate Vice President | Education, University of Pennsylvania; Trustee of the |
(retired 2008) of Xerox Corporation (document manage- | National Constitution Center; Chair of the Presidential |
ment products and services); Executive in Residence | Commission for the Study of Bioethical Issues. |
and 2009–2010 Distinguished Minett Professor at | |
the Rochester Institute of Technology; Lead Director | JoAnn Heffernan Heisen |
of SPX FLOW, Inc. (multi-industry manufacturing); | Born 1950. Trustee Since July 1998. Principal |
Director of the United Way of Rochester, the University | Occupation(s) During the Past Five Years and |
of Rochester Medical Center, Monroe Community | Other Experience: Corporate Vice President and |
College Foundation, North Carolina A&T University, | Chief Global Diversity Officer (retired 2008) and |
and Roberts Wesleyan College. | Member of the Executive Committee (1997–2008) |
of Johnson & Johnson (pharmaceuticals/medical | |
devices/consumer products); Director of Skytop | |
Lodge Corporation (hotels) and the Robert Wood | |
Johnson Foundation; Member of the Advisory | |
Board of the Institute for Women’s Leadership | |
at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Treasurer Since May 2015. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Other Experience: Principal of The Vanguard Group, | |
consumer services), and of Oxfam America; Director | Inc.; Treasurer of each of the investment companies | |
of SKF AB (industrial machinery), Hyster-Yale Materials | served by The Vanguard Group; Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2010–2015); Assistant Controller of each of | |
Research; Member of the Advisory Council for the | the investment companies served by The Vanguard | |
College of Arts and Letters and of the Advisory Board | Group (2001–2010). | |
to the Kellogg Institute for International Studies, both | ||
at the University of Notre Dame. | Thomas J. Higgins | |
Born 1957. Chief Financial Officer Since September | ||
Mark Loughridge | 2008. Principal Occupation(s) During the Past Five | |
Born 1953. Trustee Since March 2012. Principal | Years and Other Experience: Principal of The Vanguard | |
Occupation(s) During the Past Five Years and Other | Group, Inc.; Chief Financial Officer of each of the | |
Experience: Senior Vice President and Chief Financial | investment companies served by The Vanguard Group; | |
Officer (retired 2013) at IBM (information technology | Treasurer of each of the investment companies served | |
services); Fiduciary Member of IBM’s Retirement Plan | by The Vanguard Group (1998–2008). | |
Committee (2004–2013); Director of the Dow Chemical | ||
Company; Member of the Council on Chicago Booth. | Peter Mahoney | |
Born 1974. Controller Since May 2015. Principal | ||
Scott C. Malpass | Occupation(s) During the Past Five Years and Other | |
Born 1962. Trustee Since March 2012. Principal | Experience: Head of Global Fund Accounting | |
Occupation(s) During the Past Five Years and Other | at The Vanguard Group, Inc.; Controller of each of the | |
Experience: Chief Investment Officer and Vice | investment companies served by The Vanguard Group; | |
President at the University of Notre Dame; Assistant | Head of International Fund Services at The Vanguard | |
Professor of Finance at the Mendoza College of | Group (2008–2014). | |
Business at Notre Dame; Member of the Notre Dame | ||
403(b) Investment Committee, the Board of Advisors | Heidi Stam | |
for Spruceview Capital Partners, and the Investment | Born 1956. Secretary Since July 2005. Principal | |
Advisory Committee of Major League Baseball; Board | Occupation(s) During the Past Five Years and | |
Member of TIFF Advisory Services, Inc., and Catholic | Other Experience: Managing Director of The Vanguard | |
Investment Services, Inc. (investment advisors). | Group, Inc.; General Counsel of The Vanguard Group; | |
Secretary of The Vanguard Group and of each of the | ||
André F. Perold | investment companies served by The Vanguard Group; | |
Born 1952. Trustee Since December 2004. Principal | Director and Senior Vice President of Vanguard | |
Occupation(s) During the Past Five Years and Other | Marketing Corporation. | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Vanguard Senior ManagementTeam | |
(retired 2011); Chief Investment Officer and Managing | ||
Partner of HighVista Strategies LLC (private investment | Mortimer J. Buckley | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Kathleen C. Gubanich | Thomas M. Rampulla |
the Museum of Fine Arts Boston. | Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi | |
Peter F. Volanakis | Chris D. McIsaac | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Chairman Emeritus and Senior Advisor | |
Experience: President and Chief Operating Officer | ||
(retired 2010) of Corning Incorporated (communications | John J. Brennan | |
equipment); Trustee of Colby-Sawyer College and | Chairman, 1996–2009 | |
Chairman of its Finance and Enrollment Committee; | Chief Executive Officer and President, 1996–2008 | |
Member of the Advisory Board of the Norris Cotton | ||
Cancer Center. | Founder | |
John C. Bogle | ||
Chairman and Chief Executive Officer, 1974–1996 |
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600 | ||
Valley Forge, PA 19482-2600 | ||
Connect with Vanguard® > vanguard.com | ||
Fund Information > 800-662-7447 | CFA® is a registered trademark owned by CFA Institute. | |
Direct Investor Account Services > 800-662-2739 | ||
Institutional Investor Services > 800-523-1036 | ||
Text Telephone for People | ||
Who Are Deaf or Hard of Hearing> 800-749-7273 | ||
This material may be used in conjunction | ||
with the offering of shares of any Vanguard | ||
fund only if preceded or accompanied by | ||
the fund’s current prospectus. | ||
All comparative mutual fund data are from Lipper, a | ||
Thomson Reuters Company, or Morningstar, Inc., unless | ||
otherwise noted. | ||
You can obtain a free copy of Vanguard’s proxy voting | ||
guidelines by visiting vanguard.com/proxyreporting or by | ||
calling Vanguard at 800-662-2739. The guidelines are | ||
also available from the SEC’s website, sec.gov. In | ||
addition, you may obtain a free report on how your fund | ||
voted the proxies for securities it owned during the 12 | ||
months ended June 30. To get the report, visit either | ||
vanguard.com/proxyreporting or sec.gov. | ||
You can review and copy information about your fund at | ||
the SEC’s Public Reference Room in Washington, D.C. To | ||
find out more about this public service, call the SEC at | ||
202-551-8090. Information about your fund is also | ||
available on the SEC’s website, and you can receive | ||
copies of this information, for a fee, by sending a | ||
request in either of two ways: via email addressed to | ||
publicinfo@sec.gov or via regular mail addressed to the | ||
Public Reference Section, Securities and Exchange | ||
Commission, Washington, DC 20549-1520. | ||
© 2016 The Vanguard Group, Inc. | ||
All rights reserved. | ||
Vanguard Marketing Corporation, Distributor. | ||
Q7522 062016 |
Semiannual Report | April 30, 2016
Vanguard Alternative Strategies Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
Contents | |
Your Fund’s Total Returns. | 1 |
Chairman’s Letter. | 2 |
Advisor’s Report. | 6 |
Fund Profile. | 9 |
Performance Summary. | 11 |
Financial Statements. | 12 |
About Your Fund’s Expenses. | 31 |
Trustees Approve Advisory Arrangement. | 33 |
Glossary. | 34 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows us to help millions of clients around the world reach their financial goals.
Your Fund’s Total Returns
Six Months Ended April 30, 2016 | |
Total | |
Returns | |
Vanguard Alternative Strategies Fund | 5.48% |
FTSE 3-month U.S. T-Bill Index + 4% | 2.12 |
Your Fund’s Performance at a Glance | ||||
October 31, 2015, Through April 30, 2016 | ||||
Distributions Per Share | ||||
Starting | Ending | Income | Capital | |
Share Price | Share Price | Dividends | Gains | |
Vanguard Alternative Strategies Fund | $20.23 | $21.24 | $0.095 | $0.000 |
1
Chairman’s Letter
Dear Shareholder,
For the six months ended April 30, 2016, Vanguard Alternative Strategies Fund returned 5.48%. Its benchmark index, the FTSE 3-month U.S. T-Bill Index + 4%, returned 2.12% as yields on short-term Treasury bills remained just above zero.
The Alternative Strategies Fund seeks to generate returns that have low correlation with the returns of the stock and bond markets and that are less volatile than those of the overall U.S. stock market. The fund tries to earn a positive absolute return regardless of the performance of the broad stock and bond markets. This contrasts with more familiar relative return funds—such as index funds that seek to track the performance of a market benchmark and actively managed funds that try to beat a designated benchmark.
As I mentioned in the fund’s first report last fall, we chose a benchmark index that we believe represents a reasonable long-term performance expectation for the fund’s strategy. Also, the T-bill + 4% annual rate referenced by the benchmark aligns with the target annual payout rate for Vanguard Managed Payout Fund, a major shareholder in the Alternative Strategies Fund. The fund is also available to Vanguard Institutional Advisory Services (VIAS) clients, who may seek additional diversification and liquid investments beyond traditional stocks and bonds. VIAS delivers strategic advice, portfolio management, and research and expertise for defined benefit plans, endowments, and foundations.
2
U.S. stocks traveled a rocky road, finishing the period about even
The broad U.S. stock market delivered flat returns for a half year marked by inconsistency, sharp declines, and even sharper rallies.
After struggling during the first four months of the period, U.S. stocks rebounded in the final two. Most of the surge came in March as investors cheered the Federal Reserve’s indication that it would raise interest rates fewer times in 2016 than originally anticipated. Continued aggressive stimulus by central banks in Europe and Asia and a recovery in oil prices also helped.
International stocks traced an even rockier path than their U.S. counterparts en route to modestly negative returns for U.S.-based investors. Developed markets, especially in Europe, notched weak results, while emerging markets slightly advanced.
Still-low interest rates helped bonds outperform stocks
The broad U.S. bond market returned almost 3% for the half year. After modest declines in November and December, the U.S. bond market posted four months of gains, helped by the Fed’s cautious approach to raising short-term rates.
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2016 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 0.22% | 0.34% | 10.81% |
Russell 2000 Index (Small-caps) | -1.90 | -5.94 | 6.98 |
Russell 3000 Index (Broad U.S. market) | 0.06 | -0.18 | 10.50 |
FTSE All-World ex US Index (International) | -1.52 | -10.65 | 0.25 |
Bonds | |||
Barclays U.S. Aggregate Bond Index (Broad taxable market) | 2.82% | 2.72% | 3.60% |
Barclays Municipal Bond Index (Broad tax-exempt market) | 3.55 | 5.29 | 5.37 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.08 | 0.10 | 0.05 |
CPI | |||
Consumer Price Index | 0.60% | 1.13% | 1.25% |
3
The yield of the 10-year U.S. Treasury note closed at 1.83% at the end of April, down from 2.17% six months earlier. (Bond prices and yields move in opposite directions.)
Even though the Fed raised short-term rates a quarter percentage point in December, the target rate of 0.25%–0.5% is still historically low, restraining returns for money market funds and savings accounts.
International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned almost 9% in local currencies. After currency hedging, international bonds returned more than 3%, ahead of the broad U.S. bond market and the broad U.S. and international stock markets.
A combination of strategies helps the fund achieve its objectives
In managing the fund, Vanguard Quantitative Equity Group (QEG) uses several alternative strategies that individually and collectively are expected to have low correlation with traditional capital markets.
Also, the fund’s total return is expected to be less volatile than that of the overall U.S. stock market—and it was during the bumpy half year. The broad U.S. stock market’s monthly returns ranged from a low of about –6% to a high of about 7%, while the fund’s ranged from about –2% to 3%. Statistically, volatility is measured over longer periods, but this simple example illustrates the fund’s smoother ride.
Since the fund’s inception in August 2015, QEG has used five approximately equal-weighted alternative strategies: long/short equity, event-driven equity (which seeks to capitalize on price discrepancies and returns generated by corporate activity such as mergers), foreign currencies (using forward contracts), fixed income relative value, and commodity-linked investments.
Using rules-based strategies and rigorous risk-management techniques, QEG invests only in liquid securities and derivative instruments (such as Treasury futures and forward foreign currency contracts). QEG continually assesses investable opportunities, including additional strategies.
Over the six months, all five strategies—led by long/short equity—added to the fund’s total return.
For more on the fund’s investment strategy and management, please see the Advisor’s Report that follows this letter.
Whether it’s index or active, low costs and talent matter
If you listen to some investing pundits, you might think index investing and actively managed investing are incompatible opposites. At Vanguard, it’s not index versus active. In fact, depending on your goals, it could well be index and active.
4
As an indexing pioneer, in 1976, we opened the first index mutual fund, giving shareholders an opportunity to track the performance of the S&P 500 Index. But our roots in active management—which aims to choose investments that will outperform the market—go back to the 1929 launch of what became Vanguard Wellington™ Fund.
Our index and active funds share important traits. Both are low cost, and as their assets grow, we can take advantage of the economies of scale by further reducing fund expense ratios. That allows you to keep more of your fund’s returns.
Talent and experience are also vital regardless of a fund’s management style.
The indexing expertise honed over many decades by our portfolio managers helps our stock and bond index funds meet their objectives of closely tracking their benchmarks.
Our active funds also benefit from world-class managers—both our own experts, such as the team that manages your fund, and premier money managers we hire around the globe. There’s no guarantee that active management will lead to market-beating results, but the combination of talent and low costs can give investors a better chance of success.
If you’d like to know more, see Keys to Improving the Odds of Active Management Success and The Case for Index-Fund Investing, available at vanguard.com/research.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 18, 2016
5
Advisor’s Report
For the six months ended April 30, 2016, Vanguard Alternative Strategies Fund returned 5.48%. Its benchmark, the FTSE 3-month U.S. T-Bill Index + 4%, returned 2.12%.
Investment objective and strategy
Our objective for this portfolio is to generate returns that have low correlation with the returns of more traditional asset classes such as stocks and bonds. The fund seeks to meet its objective by using a combination of five alternative strategies that span multiple asset classes—namely equity, fixed income, currency, and commodity-linked investments.
Each strategy can use long and short positions to try to minimize market exposure while attempting to capture attractive risk premiums. Individually, the strategies are expected to have low long-term correlation with one another and with traditional capital markets; that should produce a portfolio with lower volatility than the overall U.S. stock market.
The strategies the fund currently employs include:
• Long/short equity: This strategy focuses on building a long/short portfolio of equity securities based on their volatility characteristics by executing long positions in low-volatility stocks and short positions in high-volatility stocks. The strategy seeks to capture a risk-adjusted spread by constructing its positions to reduce the net market exposure of the overall portfolio to general market movements (beta).
• Event-driven: This strategy seeks to profit from the expectation that a specific event or catalyst (such as a merger/ acquisition deal closure) will affect the stock price of a U.S. or foreign company.
• Fixed income: This strategy seeks to exploit the steepness of the Treasury yield curve that is created by investors’ desire to hold shorter-maturity bonds because they tend to be more liquid (trade easily). We try to capture this premium by investing in Treasury futures with longer times to maturity and borrowing those with short maturities.
• Currencies: This strategy seeks to benefit from expected currency movements across countries by using long and short foreign currency exchange forward contracts. It does this by selling currencies of countries with poor fundamental characteristics and buying currencies of countries with strong fundamental characteristics.
• Commodity-linked investments: This strategy seeks to capture the risk premium associated with inventory levels of commodities, which are reflected in the prices in their futures contracts.
We take long positions in commodities whose prices are expected to rise because of limited inventory, and short positions in commodities whose prices are expected to fall.
In addition, the fund can use leverage as it seeks to match the expected risk profile for each strategy to a targeted level equal to that of the recent equity markets.
6
For example, if the equity market’s average volatility over the last two years was 20% and one of our strategies had an unleveraged volatility of 10% over that period, the strategy’s leverage target would be 2.0 times its equal-weighted notional exposure. This analysis (subject to internal limits to control leverage for each of the strategies and in the fund overall) extends to each strategy where prudent and necessary. The goal is to achieve a similar risk profile across each of the five strategies to maximize diversification and performance.
The investment environment
Global equity market results for the six months were unimpressive, as seen in the –0.86% return of the FTSE All World Index. Stocks struggled in late 2015 and early 2016 but recovered substantially in March and April. Bonds performed better: The broad U.S. taxable bond market returned almost 3%, and international bonds returned almost 9% (before currency hedging).
After raising interest rates in December, the Federal Reserve has been cautious about further increases, citing slowing global economic activity and relatively muted U.S. household spending. U.S. real GDP for the first quarter of 2016 increased at an annual rate of 0.5%, a stark deceleration from the prior quarter’s 1.4%. Declines in corporate investment, federal spending, and net exports notably challenged growth. The unemployment rate stood at 5% in April, unchanged from the start of the half year.
Outside the United States, both developed and emerging-market stocks, bonds, and currencies were quite volatile. Later in the period, they recovered somewhat—especially stocks and currencies, helped by the Fed’s keeping rates low. Crude oil prices also recovered in recent months even though oil-producing nations failed to reach an agreement to curb output when they met in Doha earlier this year.
The fund’s successes and shortfalls
Although it is important to understand the impact of macroeconomic factors on the markets, our process seeks to earn a positive absolute return regardless of the performance of the broad stock and bond markets. All five strategies produced positive six-month returns, but the low correlations among them led to varying degrees of contribution to overall performance. More specifically, the long/ short equity and event-driven strategies performed best and our currency strategy performed much more modestly.
In addition to generating positive returns, the fund met its objective of low correlation with the returns of traditional asset classes. Its correlation with the broad U.S. stock market (as measured by the Russell 3000 Index) was –0.05, and its correlation with the broad U.S. bond market (as measured by the Barclays U.S. Aggregate Bond Index) was 0.46.
7
The fund benefited from a variety of exposures leading to diversification that helped reduce overall volatility during a half year that was noticeably volatile until the last two months. The diversification benefit can be seen in the fund’s annualized daily volatility of returns; it was 6.4% for the six months, less than half that of the broad U.S. stock market (16.7%).
Our approach to portfolio construction paid off during the period in both relative performance and low volatility. We look forward to the second half of the fiscal year.
Portfolio Managers:
Michael R. Roach, CFA
Anatoly Shtekhman, CFA
Binbin Guo, Principal, Head of
Equity Research and Portfolio Strategies
Vanguard Quantitative Equity Group
May 20, 2016
8
Alternative Strategies Fund
Fund Profile
As of April 30, 2016
Fund Characteristics | |
Ticker Symbol | VASFX |
Total Expense Ratio1 | 0.73% |
Management Expenses | 0.30% |
Dividend Expenses on Securities | |
Sold Short2 | 0.34% |
Borrowing Expenses on Securities | |
Sold Short2 | 0.03% |
Other Expenses | 0.01% |
Turnover Rate (Annualized) | 84% |
Short-Term Reserves | 23.5% |
Portfolio Characteristics | ||
Long | Short | |
Portfolio | Portfolio | |
Number of Stocks | 317 | 159 |
Median Market Cap | $6.0B | $6.2B |
Price/Earnings Ratio | 29.8x | 28.1x |
Price/Book Ratio | 2.5x | 1.8x |
Return on Equity | 12.7% | 9.8% |
Earnings Growth | ||
Rate | 4.5% | 13.6% |
Foreign Holdings | 6.5% | 0.0% |
Sector Diversification (% of equity exposure) | ||
Long | Short | |
Portfolio | Portfolio | |
Consumer Discretionary | 15.0% | 8.3% |
Consumer Staples | 6.3 | 2.4 |
Energy | 2.5 | 13.5 |
Financials | 15.3 | 30.2 |
Health Care | 9.8 | 14.2 |
Industrials | 14.1 | 7.8 |
Information Technology | 18.0 | 13.1 |
Materials | 6.4 | 9.3 |
Telecommunication Services | 1.8 | 0.4 |
Utilities | 10.8 | 0.8 |
1 The total expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the six months ended April 30, 2016, the annualized total expense ratio was 0.75%.
2 In connection with a short sale, the fund may receive income or be charged a fee based on the market value of the borrowed stock. When a cash dividend is declared on a stock the fund has sold short, the fund is required to pay an amount equal to that dividend to the party from which the fund borrowed the stock and to record the payment of the dividend as an expense.
9
Alternative Strategies Fund
Ten Largest Holdings1 (% of total net assets) | ||
Long Portfolio | ||
AGL Resources Inc. | Gas Utilities | 1.0% |
IHS Inc. | Research & | |
Consulting Services | 0.9 | |
NTELOS Holdings Corp. | Wireless | |
Telecommunication | ||
Services | 0.9 | |
First Niagara Financial | ||
Group Inc. | Regional Banks | 0.9 |
Apollo Residential | ||
Mortgage Inc. | Mortgage REITs | 0.9 |
Rofin-Sinar Technologies | Electronic Equipment | |
Inc. | & Instruments | 0.8 |
Cvent Inc. | Internet Software & | |
Services | 0.8 | |
Astoria Financial Corp. | Thrifts & Mortgage | |
Finance | 0.8 | |
RONA Inc. | Home Improvement | |
Retail | 0.8 | |
Cigna Corp. | Managed Health | |
Care | 0.8 | |
Top Ten | 8.6% |
Ten Largest Holdings1 (% of total net assets) | ||
Short Portfolio | ||
Markit Ltd. | Specialized Finance | 0.9% |
New York Community | Thrifts & Mortgage | |
Bancorp Inc. | Finance | 0.8 |
Dow Chemical Co. | Diversified | |
Chemicals | 0.8 | |
BBCN Bancorp Inc. | Regional Banks | 0.7 |
Halliburton Co. | Oil & Gas | |
Equipment & | ||
Services | 0.7 | |
KeyCorp | Regional Banks | 0.7 |
Huntington Bancshares | ||
Inc. | Regional Banks | 0.6 |
Aetna Inc. | Managed Health | |
Care | 0.4 | |
Anthem Inc. | Managed Health | |
Care | 0.4 | |
Apollo Commercial Real | ||
Estate Finance Inc. | Mortgage REITs | 0.4 |
Top Ten | 6.4% |
1 The holdings listed exclude any temporary cash investments and equity index products.
10
Alternative Strategies 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.
Fiscal-Period Total Returns (%): August 11, 2015, Through April 30, 2016
Total Returns: Periods Ended March 31, 2016 | ||
This table presents returns through the latest calendar quarter—rather than through the end of the fiscal period. | ||
Securities and Exchange Commission rules require that we provide this information. | ||
Inception | Since | |
Date | Inception | |
Alternative Strategies Fund | 8/11/2015 | 8.40% |
See Financial Highlights for dividend and capital gains information.
11
Alternative Strategies Fund
Consolidated Financial Statements (unaudited)
Consolidated Statement of Net Assets
As of April 30, 2016
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks—Long Positions (63.6%) | |||
Consumer Discretionary (9.5%) | |||
RONA Inc. | 70,800 | 1,347 | |
Cablevision Systems Corp. | |||
Class A | 37,000 | 1,235 | |
* | Apollo Education Group Inc. | 155,600 | 1,214 |
* | Tumi Holdings Inc. | 44,600 | 1,190 |
* | Carmike Cinemas Inc. | 37,400 | 1,122 |
Starwood Hotels & Resorts | |||
Worldwide Inc. | 12,500 | 1,023 | |
* | DreamWorks Animation | ||
SKG Inc. Class A | 25,000 | 998 | |
* | Kuoni Reisen Holding AG | 2,475 | 968 |
Kinugawa Rubber Industrial | |||
Co. Ltd. | 105,000 | 731 | |
Thomson Reuters Corp. | 4,262 | 175 | |
McDonald’s Corp. | 1,369 | 173 | |
Newell Brands Inc. | 3,752 | 171 | |
Williams-Sonoma Inc. | 2,881 | 169 | |
Six Flags Entertainment | |||
Corp. | 2,820 | 169 | |
Aramark | 5,048 | 169 | |
Omnicom Group Inc. | 2,024 | 168 | |
Home Depot Inc. | 1,252 | 168 | |
Brinker International Inc. | 3,602 | 167 | |
Target Corp. | 2,094 | 166 | |
† | Wendy’s Co. | 15,168 | 165 |
Dunkin’ Brands Group Inc. | 3,536 | 164 | |
* | Sirius XM Holdings Inc. | 41,538 | 164 |
Dollar General Corp. | 1,988 | 163 | |
Choice Hotels International | |||
Inc. | 3,202 | 162 | |
† | John Wiley & Sons Inc. | ||
Class A | 3,260 | 162 | |
† | Lowe’s Cos. Inc. | 2,124 | 161 |
*,† | NVR Inc. | 97 | 161 |
Genuine Parts Co. | 1,675 | 161 | |
† | TJX Cos. Inc. | 2,106 | 160 |
*,† | AutoZone Inc. | 208 | 159 |
Market | |||
Value• | |||
Shares | ($000) | ||
† | Darden Restaurants Inc. | 2,537 | 158 |
*,† | O’Reilly Automotive Inc. | 597 | 157 |
CST Brands Inc. | 4,118 | 156 | |
Ross Stores Inc. | 2,738 | 155 | |
Domino’s Pizza Inc. | 1,281 | 155 | |
Comcast Corp. Class A | 2,530 | 154 | |
Service Corp. International | 5,743 | 153 | |
NIKE Inc. Class B | 2,574 | 152 | |
† | Nordstrom Inc. | 2,955 | 151 |
† | Starbucks Corp. | 2,615 | 147 |
* | Bed Bath & Beyond Inc. | 3,045 | 144 |
Walt Disney Co. | 1,366 | 141 | |
VF Corp. | 2,130 | 134 | |
L Brands Inc. | 1,712 | 134 | |
* | MSG Networks Inc. | 7,761 | 133 |
Foot Locker Inc. | 2,130 | 131 | |
Regal Entertainment Group | |||
Class A | 5,303 | 111 | |
Visteon Corp. | 1,342 | 107 | |
15,878 | |||
Consumer Staples (4.0%) | |||
* | Rite Aid Corp. | 160,000 | 1,288 |
SABMiller plc | 20,700 | 1,268 | |
Spectrum Brands | |||
Holdings Inc. | 1,540 | 175 | |
† | Sysco Corp. | 3,765 | 174 |
CVS Health Corp. | 1,710 | 172 | |
Kellogg Co. | 2,230 | 171 | |
Campbell Soup Co. | 2,741 | 169 | |
Coca-Cola Co. | 3,761 | 169 | |
† | Constellation Brands Inc. | ||
Class A | 1,073 | 167 | |
Hershey Co. | 1,796 | 167 | |
Philip Morris International | |||
Inc. | 1,698 | 167 | |
Wal-Mart Stores Inc. | 2,488 | 166 | |
JM Smucker Co. | 1,299 | 165 | |
Dr Pepper Snapple Group | |||
Inc. | 1,808 | 164 | |
General Mills Inc. | 2,677 | 164 |
12
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Colgate-Palmolive Co. | 2,315 | 164 | |
PepsiCo Inc. | 1,565 | 161 | |
† | Church & Dwight Co. Inc. | 1,736 | 161 |
McCormick & Co. Inc. | 1,712 | 161 | |
Reynolds American Inc. | 3,235 | 161 | |
Altria Group Inc. | 2,539 | 159 | |
Kimberly-Clark Corp. | 1,231 | 154 | |
Procter & Gamble Co. | 1,909 | 153 | |
Clorox Co. | 1,201 | 150 | |
Costco Wholesale Corp. | 997 | 148 | |
Hormel Foods Corp. | 3,718 | 143 | |
Estee Lauder Cos. Inc. | |||
Class A | 1,289 | 124 | |
† | Pinnacle Foods Inc. | 2,232 | 95 |
Brown-Forman Corp. Class B | 323 | 31 | |
6,711 | |||
Energy (1.6%) | |||
Baker Hughes Inc. | 26,000 | 1,257 | |
Columbia Pipeline Group Inc. | 48,100 | 1,232 | |
Exxon Mobil Corp. | 1,929 | 171 | |
2,660 | |||
Financials (9.7%) | |||
First Niagara Financial Group | |||
Inc. | 136,300 | 1,439 | |
Apollo Residential Mortgage | |||
Inc. | 105,100 | 1,425 | |
Astoria Financial Corp. | 93,000 | 1,399 | |
FirstMerit Corp. | 57,800 | 1,281 | |
Fidelity & Guaranty Life | 48,042 | 1,270 | |
Wilshire Bancorp Inc. | 110,100 | 1,186 | |
* | Phoenix Cos. Inc. | 26,200 | 970 |
Cash America International | |||
Inc. | 7,800 | 288 | |
† | Lamar Advertising Co. | ||
Class A | 2,861 | 177 | |
Empire State Realty Trust Inc. | 9,518 | 176 | |
Marsh & McLennan Cos. Inc. | 2,786 | 176 | |
Cincinnati Financial Corp. | 2,634 | 174 | |
White Mountains Insurance | |||
Group Ltd. | 207 | 172 | |
American Homes 4 Rent | |||
Class A | 10,826 | 171 | |
MFA Financial Inc. | 24,746 | 171 | |
† | Annaly Capital Management | ||
Inc. | 16,405 | 171 | |
Brown & Brown Inc. | 4,758 | 167 | |
TFS Financial Corp. | 9,278 | 166 | |
Hanover Insurance Group Inc. | 1,936 | 166 | |
* | Berkshire Hathaway Inc. | ||
Class B | 1,134 | 165 | |
Chimera Investment Corp. | 11,522 | 164 | |
† | Two Harbors Investment | ||
Corp. | 20,710 | 162 | |
Everest Re Group Ltd. | 874 | 162 |
Market | |||
Value• | |||
Shares | ($000) | ||
Tanger Factory Outlet | |||
Centers Inc. | 4,583 | 161 | |
American Capital Agency | |||
Corp. | 8,747 | 161 | |
Validus Holdings Ltd. | 3,474 | 160 | |
Axis Capital Holdings Ltd. | 3,004 | 160 | |
† | WR Berkley Corp. | 2,831 | 158 |
† | Starwood Property Trust Inc. | 8,175 | 158 |
Chubb Ltd. | 1,341 | 158 | |
Equity LifeStyle Properties | |||
Inc. | 2,293 | 157 | |
* | Arch Capital Group Ltd. | 2,224 | 157 |
Arthur J Gallagher & Co. | 3,395 | 156 | |
† | American Financial Group Inc. | 2,256 | 156 |
Progressive Corp. | 4,764 | 155 | |
Erie Indemnity Co. Class A | 1,643 | 155 | |
Morningstar Inc. | 1,861 | 155 | |
People’s United Financial Inc. | 9,908 | 154 | |
Post Properties Inc. | 2,674 | 153 | |
Aspen Insurance Holdings Ltd. | 3,303 | 153 | |
Travelers Cos. Inc. | 1,391 | 153 | |
RenaissanceRe Holdings Ltd. | 1,377 | 153 | |
WP Carey Inc. | 2,493 | 152 | |
Columbia Property Trust Inc. | 6,810 | 152 | |
CBOE Holdings Inc. | 2,431 | 151 | |
Torchmark Corp. | 2,577 | 149 | |
† | ProAssurance Corp. | 3,125 | 149 |
† | FactSet Research Systems | ||
Inc. | 958 | 144 | |
XL Group plc Class A | 4,081 | 133 | |
American Tower Corporation | 1,258 | 132 | |
Healthcare Trust of America | |||
Inc. Class A | 3,967 | 115 | |
Taubman Centers Inc. | 1,467 | 102 | |
Piedmont Office Realty Trust | |||
Inc. Class A | 1,588 | 32 | |
* | Equity Commonwealth | 813 | 23 |
* | Alleghany Corp. | 33 | 17 |
16,222 | |||
Health Care (6.3%) | |||
Cigna Corp. | 9,700 | 1,344 | |
† | Humana Inc. | 7,500 | 1,328 |
* | Alere Inc. | 26,900 | 1,049 |
St. Jude Medical Inc. | 4,000 | 305 | |
* | Boston Scientific Corp. | 8,295 | 182 |
* | VCA Inc. | 2,884 | 182 |
Baxter International Inc. | 4,088 | 181 | |
CR Bard Inc. | 851 | 180 | |
† | Zimmer Biomet Holdings Inc. | 1,555 | 180 |
Thermo Fisher Scientific Inc. | 1,204 | 174 | |
Eli Lilly & Co. | 2,299 | 174 | |
Becton Dickinson and Co. | 1,071 | 173 | |
* | Laboratory Corp. of America | ||
Holdings | 1,375 | 172 | |
Anthem Inc. | 1,221 | 172 |
13
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
† | Merck & Co. Inc. | 3,129 | 172 |
Pfizer Inc. | 5,174 | 169 | |
† | Stryker Corp. | 1,551 | 169 |
Medtronic plc | 2,135 | 169 | |
* | Henry Schein Inc. | 1,000 | 169 |
* | VWR Corp. | 6,326 | 168 |
Agilent Technologies Inc. | 4,110 | 168 | |
Quest Diagnostics Inc. | 2,210 | 166 | |
* | DaVita HealthCare Partners | ||
Inc. | 2,224 | 164 | |
Patterson Cos. Inc. | 3,734 | 162 | |
* | Varian Medical Systems Inc. | 1,991 | 162 |
* | Bio-Rad Laboratories Inc. | ||
Class A | 1,139 | 161 | |
Teleflex Inc. | 1,036 | 161 | |
Bio-Techne Corp. | 1,729 | 161 | |
PerkinElmer Inc. | 3,195 | 161 | |
DENTSPLY SIRONA Inc. | 2,701 | 161 | |
* | MEDNAX Inc. | 2,253 | 161 |
Johnson & Johnson | 1,433 | 161 | |
* | Mettler-Toledo International | ||
Inc. | 447 | 160 | |
* | Intuitive Surgical Inc. | 255 | 160 |
* | Waters Corp. | 1,222 | 159 |
* | Express Scripts Holding Co. | 2,061 | 152 |
AmerisourceBergen Corp. | |||
Class A | 1,763 | 150 | |
Cardinal Health Inc. | 1,911 | 150 | |
* | Quintiles Transnational | ||
Holdings Inc. | 2,149 | 148 | |
Hill-Rom Holdings Inc. | 3,059 | 148 | |
*,† | Cerner Corp. | 2,579 | 145 |
* | IMS Health Holdings Inc. | 5,271 | 140 |
Abbott Laboratories | 3,215 | 125 | |
10,398 | |||
Industrials (9.0%) | |||
* | IHS Inc. Class A | 12,500 | 1,540 |
* | Virgin America Inc. | 23,800 | 1,325 |
* | TNT Express NV | 141,000 | 1,280 |
ADT Corp. | 29,900 | 1,255 | |
* | PowerSecure International | ||
Inc. | 64,098 | 1,200 | |
USG People NV | 50,000 | 998 | |
* | Neptune Orient Lines Ltd. | 913,600 | 872 |
† | Lockheed Martin Corp. | 776 | 180 |
MSC Industrial Direct Co. | |||
Inc. Class A | 2,272 | 176 | |
Honeywell International | |||
Inc. | 1,537 | 176 | |
* | Copart Inc. | 4,079 | 175 |
Illinois Tool Works Inc. | 1,653 | 173 | |
Stanley Black & Decker Inc. | 1,543 | 173 | |
Danaher Corp. | 1,779 | 172 | |
United Technologies Corp. | 1,643 | 171 | |
Equifax Inc. | 1,425 | 171 |
Market | ||||
Value• | ||||
Shares | ($000) | |||
† | Toro Co. | 1,974 | 171 | |
† | Watsco Inc. | 1,261 | 170 | |
Waste Connections Inc. | 2,516 | 169 | ||
Republic Services Inc. Class A | 3,596 | 169 | ||
† | Waste Management Inc. | 2,862 | 168 | |
Allegion plc | 2,565 | 168 | ||
JB Hunt Transport Services | ||||
Inc. | 2,013 | 167 | ||
BWX Technologies Inc. | 4,991 | 167 | ||
WW Grainger Inc. | 710 | 167 | ||
3M Co. | 992 | 166 | ||
Cintas Corp. | 1,843 | 165 | ||
United Parcel Service Inc. | ||||
Class B | 1,573 | 165 | ||
KAR Auction Services Inc. | 4,393 | 165 | ||
Expeditors International of | ||||
Washington Inc. | 3,326 | 165 | ||
Rockwell Collins Inc. | 1,867 | 165 | ||
IDEX Corp. | 1,970 | 161 | ||
† | General Electric Co. | 5,240 | 161 | |
† | Carlisle Cos. Inc. | 1,581 | 161 | |
Nielsen Holdings plc | 3,082 | 161 | ||
† | Snap-on Inc. | 981 | 156 | |
*,† | TransDigm Group Inc. | 682 | 155 | |
Roper Technologies Inc. | 875 | 154 | ||
Boeing Co. | 1,125 | 152 | ||
General Dynamics Corp. | 1,076 | 151 | ||
* | Verisk Analytics Inc. Class A | 1,915 | 149 | |
AMETEK Inc. | 3,081 | 148 | ||
† | Rollins Inc. | 5,506 | 148 | |
Deere & Co. | 1,683 | 142 | ||
Hexcel Corp. | 3,017 | 137 | ||
Allison Transmission Holdings | ||||
Inc. | 3,532 | 102 | ||
Gategroup Holding AG | 1,403 | 77 | ||
Landstar System Inc. | 1,154 | 76 | ||
* | Stericycle Inc. | 306 | 29 | |
14,964 | ||||
Information Technology (11.4%) | ||||
* | Rofin-Sinar Technologies | |||
Inc. | 43,648 | 1,405 | ||
* | Cvent Inc. | 39,700 | 1,403 | |
* | Ruckus Wireless Inc. | 94,000 | 1,292 | |
Ingram Micro Inc. | 36,000 | 1,258 | ||
SanDisk Corp. | 16,700 | 1,255 | ||
* | Cascade Microtech Inc. | 59,200 | 1,238 | |
Lexmark International Inc. | ||||
Class A | 32,000 | 1,235 | ||
* | Multi-Fineline Electronix Inc. | 51,701 | 1,189 | |
KLA-Tencor Corp. | 16,600 | 1,161 | ||
* | Wincor Nixdorf AG | 18,800 | 1,029 | |
* | Newport Corp. | 44,000 | 1,012 | |
Opera Software ASA | 117,000 | 956 | ||
* | Fairchild Semiconductor | |||
International Inc. Class A | 46,700 | 934 |
14
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Broadridge Financial | |||
Solutions Inc. | 2,958 | 177 | |
Motorola Solutions Inc. | 2,319 | 174 | |
Harris Corp. | 2,126 | 170 | |
Paychex Inc. | 3,235 | 169 | |
International Business | |||
Machines Corp. | 1,152 | 168 | |
MasterCard Inc. Class A | 1,695 | 164 | |
*,† | Fiserv Inc. | 1,677 | 164 |
* | Genpact Ltd. | 5,864 | 164 |
† | Jack Henry & Associates Inc. | 2,016 | 163 |
Amdocs Ltd. | 2,887 | 163 | |
Amphenol Corp. Class A | 2,897 | 162 | |
Accenture plc Class A | 1,422 | 161 | |
† | Automatic Data Processing | ||
Inc. | 1,811 | 160 | |
Visa Inc. Class A | 2,036 | 157 | |
* | Gartner Inc. | 1,797 | 157 |
FLIR Systems Inc. | 5,174 | 156 | |
*,† | ANSYS Inc. | 1,718 | 156 |
CA Inc. | 5,082 | 151 | |
*,† | Synopsys Inc. | 3,168 | 150 |
† | Fidelity National Information | ||
Services Inc. | 2,186 | 144 | |
Apple Inc. | 1,519 | 142 | |
Symantec Corp. | 8,064 | 134 | |
Avnet Inc. | 1,889 | 78 | |
National Instruments Corp. | 2,797 | 77 | |
19,028 | |||
Materials (4.1%) | |||
Airgas Inc. | 9,400 | 1,339 | |
Valspar Corp. | 12,400 | 1,323 | |
EI du Pont de Nemours & | |||
Co. | 20,000 | 1,318 | |
* | Crown Holdings Inc. | 3,338 | 177 |
Monsanto Co. | 1,887 | 177 | |
RPM International Inc. | 3,472 | 176 | |
† | Sherwin-Williams Co. | 598 | 172 |
† | NewMarket Corp. | 419 | 170 |
International Flavors & | |||
Fragrances Inc. | 1,420 | 170 | |
† | Compass Minerals | ||
International Inc. | 2,263 | 170 | |
Ball Corp. | 2,339 | 167 | |
Sonoco Products Co. | 3,546 | 166 | |
† | Ashland Inc. | 1,484 | 166 |
Bemis Co. Inc. | 3,257 | 163 | |
Praxair Inc. | 1,391 | 163 | |
* | WR Grace & Co. | 2,115 | 162 |
AptarGroup Inc. | 2,131 | 162 | |
Ecolab Inc. | 1,397 | 161 | |
Scotts Miracle-Gro Co. | |||
Class A | 2,252 | 159 | |
† | Silgan Holdings Inc. | 2,984 | 151 |
6,812 |
Market | |||
Value• | |||
Shares | ($000) | ||
Other (0.0%) | |||
* | Dyax Corp CVR Exp. | ||
12/31/2019 | 28,700 | 32 | |
Telecommunication Services (1.1%) | |||
*,† | NTELOS Holdings Corp. | 164,300 | 1,520 |
AT&T Inc. | 4,509 | 175 | |
Verizon Communications | |||
Inc. | 3,272 | 166 | |
1,861 | |||
Utilities (6.9%) | |||
AGL Resources Inc. | 24,700 | 1,627 | |
Questar Corp. | 52,000 | 1,304 | |
TECO Energy Inc. | 45,500 | 1,264 | |
Empire District Electric Co. | 36,508 | 1,229 | |
Piedmont Natural Gas Co. | |||
Inc. | 18,600 | 1,112 | |
Capstone Infrastructure | |||
Corp. | 284,000 | 1,107 | |
† | American Water Works | ||
Co. Inc. | 2,533 | 184 | |
† | DTE Energy Co. | 1,996 | 178 |
† | Edison International | 2,497 | 177 |
† | Atmos Energy Corp. | 2,429 | 176 |
† | Great Plains Energy Inc. | 5,567 | 174 |
† | Alliant Energy Corp. | 2,430 | 171 |
† | Vectren Corp. | 3,501 | 171 |
Duke Energy Corp. | 2,152 | 170 | |
Pinnacle West Capital Corp. | 2,316 | 168 | |
† | Ameren Corp. | 3,500 | 168 |
Consolidated Edison Inc. | 2,239 | 167 | |
Xcel Energy Inc. | 4,167 | 167 | |
† | Eversource Energy | 2,925 | 165 |
† | American Electric Power | ||
Co. Inc. | 2,591 | 164 | |
† | SCANA Corp. | 2,393 | 164 |
† | Aqua America Inc. | 5,158 | 163 |
† | PG&E Corp. | 2,801 | 163 |
† | Sempra Energy | 1,575 | 163 |
† | NextEra Energy Inc. | 1,382 | 162 |
Southern Co. | 3,209 | 161 | |
† | Entergy Corp. | 2,138 | 161 |
† | Westar Energy Inc. Class A | 3,054 | 158 |
Dominion Resources Inc. | 2,047 | 146 | |
11,484 | |||
Total Common Stocks— | |||
Long Positions (Cost $103,403) | 106,050 | ||
Common Stocks Sold Short (-20.8%) | |||
Consumer Discretionary (-1.7%) | |||
Aaron’s Inc. | (6,629) | (174) | |
* | Kate Spade & Co. | (6,651) | (171) |
* | MGM Resorts International | (7,755) | (165) |
* | TopBuild Corp. | (5,282) | (165) |
Gannett Co. Inc. | (9,420) | (159) |
15
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | Netflix Inc. | (1,762) | (159) |
* | Skechers U.S.A. Inc. Class A | (4,748) | (157) |
Clear Channel Outdoor | |||
Holdings Inc. Class A | (30,647) | (157) | |
Tribune Media Co. Class A | (4,025) | (155) | |
* | TripAdvisor Inc. | (2,375) | (153) |
* | Michael Kors Holdings Ltd. | (2,954) | (153) |
Las Vegas Sands Corp. | (3,338) | (151) | |
* | Urban Outfitters Inc. | (4,939) | (150) |
Harman International | |||
Industries Inc. | (1,907) | (146) | |
TEGNA Inc. | (6,226) | (145) | |
Expedia Inc. | (1,222) | (141) | |
Royal Caribbean Cruises Ltd. | (1,717) | (133) | |
* | Groupon Inc. Class A | (35,647) | (129) |
GNC Holdings Inc. Class A | (4,926) | (120) | |
(2,883) | |||
Consumer Staples (-0.5%) | |||
Avon Products Inc. | (36,285) | (171) | |
Energizer Holdings Inc. | (3,929) | (171) | |
* | WhiteWave Foods Co. | ||
Class A | (4,028) | (162) | |
* | Sprouts Farmers Market Inc. | (5,611) | (157) |
Whole Foods Market Inc. | (4,769) | (139) | |
* | Monster Beverage Corp. | (322) | (46) |
(846) | |||
Energy (-2.8%) | |||
Halliburton Co. | (29,120) | (1,203) | |
QEP Resources Inc. | (11,310) | (203) | |
Murphy Oil Corp. | (5,641) | (202) | |
Superior Energy Services | |||
Inc. | (11,699) | (197) | |
Anadarko Petroleum Corp. | (3,565) | (188) | |
Rowan Cos. plc Class A | (9,996) | (188) | |
* | Rice Energy Inc. | (10,747) | (186) |
Devon Energy Corp. | (5,258) | (182) | |
* | Kosmos Energy Ltd. | (28,101) | (182) |
Marathon Oil Corp. | (12,872) | (181) | |
Patterson-UTI Energy Inc. | (9,165) | (181) | |
* | Continental Resources Inc. | (4,843) | (180) |
* | Newfield Exploration Co. | (4,787) | (173) |
Ensco plc Class A | (13,841) | (166) | |
Nabors Industries Ltd. | (16,687) | (164) | |
Apache Corp. | (2,988) | (163) | |
ONEOK Inc. | (4,495) | (162) | |
* | Gulfport Energy Corp. | (4,604) | (144) |
* | WPX Energy Inc. | (14,458) | (140) |
* | Cobalt International Energy | ||
Inc. | (41,378) | (134) | |
* | Memorial Resource | ||
Development Corp. | (8,941) | (117) | |
PBF Energy Inc. Class A | (1,730) | (56) | |
(4,692) |
Market | |||
Value• | |||
Shares | ($000) | ||
Financials (-6.3%) | |||
* | Markit Ltd. | (44,457) | (1,551) |
New York Community | |||
Bancorp Inc. | (93,000) | (1,398) | |
BBCN Bancorp Inc. | (77,444) | (1,210) | |
KeyCorp | (92,684) | (1,139) | |
Huntington Bancshares Inc. | (99,416) | (1,000) | |
Apollo Commercial Real | |||
Estate Finance Inc. | (43,826) | (698) | |
First Cash Financial | |||
Services Inc. | (6,552) | (300) | |
* | Genworth Financial Inc. | ||
Class A | (57,827) | (198) | |
* | OneMain Holdings Inc. | ||
Class A | (5,588) | (178) | |
Navient Corp. | (12,877) | (176) | |
NorthStar Asset | |||
Management Group Inc. | (13,863) | (173) | |
Communications Sales & | |||
Leasing Inc. | (7,313) | (170) | |
* | Affiliated Managers Group | ||
Inc. | (993) | (169) | |
Interactive Brokers Group | |||
Inc. | (4,442) | (169) | |
* | E*TRADE Financial Corp. | (6,443) | (162) |
Charles Schwab Corp. | (5,665) | (161) | |
Lazard Ltd. Class A | (4,419) | (159) | |
* | SVB Financial Group | (1,519) | (159) |
Assured Guaranty Ltd. | (6,056) | (157) | |
Popular Inc. | (5,253) | (156) | |
Morgan Stanley | (5,704) | (154) | |
Invesco Ltd. | (4,952) | (154) | |
* | Santander Consumer USA | ||
Holdings Inc. | (10,185) | (134) | |
Lincoln National Corp. | (3,069) | (133) | |
Waddell & Reed Financial | |||
Inc. Class A | (6,066) | (123) | |
* | Howard Hughes Corp. | (1,173) | (123) |
TD Ameritrade Holding Corp. | (4,111) | (123) | |
Four Corners Property | |||
Trust Inc. | (922) | (16) | |
(10,443) | |||
Health Care (-3.0%) | |||
Aetna Inc. | (6,281) | (705) | |
Anthem Inc. | (4,997) | (704) | |
* | Medivation Inc. | (3,346) | (193) |
* | IDEXX Laboratories Inc. | (2,098) | (177) |
* | Alnylam Pharmaceuticals Inc. | (2,484) | (167) |
* | Celgene Corp. | (1,601) | (166) |
* | Tenet Healthcare Corp. | (5,218) | (165) |
* | Alkermes plc | (4,132) | (164) |
* | Biogen Inc. | (596) | (164) |
* | Veeva Systems Inc. Class A | (5,791) | (159) |
* | Vertex Pharmaceuticals Inc. | (1,854) | (156) |
* | BioMarin Pharmaceutical Inc. | (1,821) | (154) |
16
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | Incyte Corp. | (2,130) | (154) |
* | Ionis Pharmaceuticals Inc. | (3,757) | (154) |
* | Community Health Systems | ||
Inc. | (8,025) | (153) | |
* | Mallinckrodt plc | (2,426) | (152) |
* | Seattle Genetics Inc. | (4,218) | (150) |
* | Akorn Inc. | (5,814) | (148) |
* | Alexion Pharmaceuticals Inc. | (1,011) | (141) |
Abbott Laboratories | (3,483) | (136) | |
* | Mylan NV | (3,244) | (135) |
* | Bluebird Bio Inc. | (2,855) | (127) |
* | Regeneron Pharmaceuticals | ||
Inc. | (330) | (124) | |
* | DexCom Inc. | (1,886) | (121) |
* | United Therapeutics Corp. | (981) | (103) |
* | Endo International plc | (2,702) | (73) |
(4,945) | |||
Industrials (-1.6%) | |||
Oshkosh Corp. | (3,995) | (195) | |
* | Colfax Corp. | (5,433) | (176) |
* | AECOM | (5,298) | (172) |
* | United Rentals Inc. | (2,556) | (171) |
* | Genesee & Wyoming Inc. | ||
Class A | (2,590) | (169) | |
* | Quanta Services Inc. | (7,109) | (169) |
Southwest Airlines Co. | (3,735) | (167) | |
* | Hertz Global Holdings Inc. | (16,105) | (149) |
Trinity Industries Inc. | (7,593) | (148) | |
* | Spirit Airlines Inc. | (3,212) | (141) |
* | Avis Budget Group Inc. | (5,518) | (139) |
* | USG Corp. | (5,086) | (137) |
KBR Inc. | (8,576) | (133) | |
Alaska Air Group Inc. | (1,828) | (129) | |
* | United Continental Holdings | ||
Inc. | (2,792) | (128) | |
Triumph Group Inc. | (3,534) | (128) | |
American Airlines Group Inc. | (3,662) | (127) | |
* | JetBlue Airways Corp. | (5,865) | (116) |
* | SPX FLOW Inc. | (570) | (17) |
(2,711) | |||
Information Technology (-2.7%) | |||
Brocade Communications | |||
Systems Inc. | (70,500) | (678) | |
Lam Research Corp. | (8,116) | (620) | |
* | FormFactor Inc. | (38,681) | (298) |
Diebold Inc. | (8,159) | (214) | |
* | Splunk Inc. | (3,258) | (169) |
* | ON Semiconductor Corp. | (17,656) | (167) |
Western Digital Corp. | (3,986) | (163) | |
Broadcom Ltd. | (1,111) | (162) | |
* | Zebra Technologies Corp. | (2,539) | (159) |
* | Rackspace Hosting Inc. | (6,865) | (157) |
* | CommScope Holding Co. Inc. | (5,122) | (156) |
* | Qorvo Inc. | (3,430) | (154) |
Market | |||
Value• | |||
Shares | ($000) | ||
* | NCR Corp. | (5,269) | (153) |
* | Zynga Inc. Class A | (62,704) | (149) |
* | Micron Technology Inc. | (13,869) | (149) |
Cognex Corp. | (3,933) | (140) | |
Cypress Semiconductor | |||
Corp. | (14,917) | (135) | |
* | Twitter Inc. | (8,896) | (130) |
* | First Solar Inc. | (2,240) | (125) |
* | ARRIS International plc | (5,276) | (120) |
* | Yelp Inc. Class A | (5,666) | (119) |
* | Tableau Software Inc. | ||
Class A | (2,103) | (109) | |
* | LinkedIn Corp. Class A | (655) | (82) |
* | PayPal Holdings Inc. | (919) | (36) |
(4,544) | |||
Materials (-1.9%) | |||
Dow Chemical Co. | (25,640) | (1,349) | |
Newmont Mining Corp. | (5,542) | (194) | |
Royal Gold Inc. | (3,081) | (193) | |
Huntsman Corp. | (11,784) | (185) | |
Steel Dynamics Inc. | (7,241) | (183) | |
Albemarle Corp. | (2,578) | (171) | |
Chemours Co. | (18,565) | (169) | |
Eagle Materials Inc. | (2,213) | (164) | |
Westlake Chemical Corp. | (3,255) | (163) | |
Mosaic Co. | (5,481) | (153) | |
Allegheny Technologies Inc. | (9,282) | (152) | |
CF Industries Holdings Inc. | (4,552) | (150) | |
(3,226) | |||
Telecommunication Services (-0.1%) | |||
Frontier Communications | |||
Corp. | (27,660) | (154) | |
Utilities (-0.2%) | |||
NRG Energy Inc. | (12,634) | (191) | |
MDU Resources Group Inc. | (3,991) | (80) | |
(271) | |||
Total Common Stocks Sold Short | |||
(Proceeds $36,607) | (34,715) | ||
Temporary Cash Investments (23.0%) | |||
Money Market Fund (17.7%) | |||
1 | Vanguard Market | ||
Liquidity Fund, | |||
0.495% | 29,517,757 | 29,518 | |
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (5.3%) | |||
2,3,4 Federal Home Loan | |||
Bank Discount Notes, | |||
0.411%, 6/2/16 | 2,900 | 2,899 |
17
Alternative Strategies Fund
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
2,3,4 Federal Home Loan | |||
Bank Discount Notes, | |||
0.352%, 7/6/16 | 2,000 | 1,999 | |
2 | Federal Home Loan | ||
Bank Discount Notes, | |||
0.431%, 10/3/16 | 600 | 599 | |
United States Treasury | |||
Bill, 0.536%, 6/9/16 | 1,000 | 1,000 | |
3,4 | United States Treasury | ||
Bill, 0.428%, 8/4/16 | 300 | 300 | |
3,4 | United States Treasury | ||
Note/Bond, 0.375%, | |||
5/31/16 | 1,047 | 1,047 | |
3,4 | United States Treasury | ||
Note/Bond, 3.250%, | |||
5/31/16 | 1,000 | 1,002 | |
8,846 | |||
Total Temporary Cash Investments | |||
(Cost $38,363) | 38,364 | ||
† Other Assets and Liabilities—Net (34.2%) | 57,092 | ||
Net Assets (100%) | |||
Applicable to 7,851,999 outstanding | |||
$.001 par value shares of beneficial | |||
interest (unlimited authorization) | 166,791 | ||
Net Asset Value Per Share | $21.24 |
Amount | |
($000) | |
Consolidated Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, | |
Long Positions, at Value | |
Unaffiliated Issuers | 114,896 |
Affiliated Vanguard Funds | 29,518 |
Total Long Positions | 144,414 |
†Cash Segregated for Short Positions | 54,123 |
Receivables for Investment Securities Sold | 2,679 |
Receivables for Accrued Income | 63 |
Investment in Vanguard | 15 |
Other Assets | 4,616 |
Total Assets | 205,910 |
Liabilities | |
Securities Sold Short, at Value | 34,715 |
Payables for Investment Securities | |
Purchased | 2,984 |
Payables to Vanguard | 70 |
Other Liabilities | 1,350 |
Total Liabilities | 39,119 |
Net Assets | 166,791 |
At April 30, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 157,288 |
Overdistributed Net Investment Income | (263) |
Accumulated Net Realized Gains | 6,758 |
Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions | 2,648 |
Investment Securities Sold Short | 1,892 |
Futures Contracts | (2,464) |
Forward Currency Contracts | 932 |
Net Assets | 166,791 |
• See Note A in Notes to Consolidated Financial Statements.
* Non-income-producing security.
† Long security positions with a value of $12,022,000 and cash of $54,123,000 are held in segregated accounts at the fund’s custodian bank and pledged to a broker-dealer as collateral for the fund’s obligation to return borrowed securities. For so long as such obligations continue, the fund’s access to these assets is subject to authorization from the broker-dealer.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
2 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
3 Security is owned by the Vanguard ASF Portfolio, which is a wholly owned subsidiary of the Alternative Strategies Fund.
4 Securities with a value of $6,900,000 have been segregated as initial margin for open futures contracts.
CVR—Contingent Value Rights.
See accompanying Notes, which are an integral part of the Financial Statements.
18
Alternative Strategies Fund
Consolidated Statement of Operations
Six Months Ended | |
April 30, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 942 |
Interest2 | 75 |
Total Income | 1,017 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 76 |
Management and Administrative | 154 |
Marketing and Distribution | 16 |
Custodian Fees | 31 |
Auditing Fees | 3 |
Trustees’ Fees and Expenses | 12 |
Dividend Expense on Securities Sold Short | 303 |
Borrowing Expense on Securities Sold Short | 6 |
Total Expenses | 601 |
Net Investment Income (Loss) | 416 |
Realized Net Gain (Loss) | |
Investment Securities —Long Positions | 240 |
Investment Securities Sold Short | 3,017 |
Futures Contracts | 5,671 |
Foreign Currencies and Forward Currency Contracts | 285 |
Realized Net Gain (Loss) | 9,213 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions | 2,256 |
Investment Securities Sold Short | (311) |
Futures Contracts | (3,279) |
Foreign Currencies and Forward Currency Contracts | 164 |
Change in Unrealized Appreciation (Depreciation) | (1,170) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,459 |
1 Dividends are net of foreign withholding taxes of $1,000. | |
2 Interest income from an affiliated company of the fund was $59,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
19
Alternative Strategies Fund
Consolidated Statement of Changes in Net Assets
Six Months | August 11, | |
Ended | 20151 to | |
April 30, | October 31, | |
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income (Loss) | 416 | 32 |
Realized Net Gain (Loss) | 9,213 | (2,420) |
Change in Unrealized Appreciation (Depreciation) | (1,170) | 4,178 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,459 | 1,790 |
Distributions | ||
Net Investment Income | (746) | — |
Realized Capital Gain | — | — |
Total Distributions | (746) | — |
Capital Share Transactions | ||
Issued | 12,041 | 162,002 |
Issued in Lieu of Cash Distributions | 746 | — |
Redeemed | (12,500) | (5,001) |
Net Increase (Decrease) from Capital Share Transactions | 287 | 157,001 |
Total Increase (Decrease) | 8,000 | 158,791 |
Net Assets | ||
Beginning of Period | 158,791 | — |
End of Period2 | 166,791 | 158,791 |
1 Inception. | ||
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($263,000) and $45,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
20
Alternative Strategies Fund
Consolidated Financial Highlights
Six Months | Aug. 11, | |
Ended | 20151 to | |
April 30, | Oct. 31, | |
For a Share Outstanding Throughout Each Period | 2016 | 2015 |
Net Asset Value, Beginning of Period | $20.23 | $20.00 |
Investment Operations | ||
Net Investment Income (Loss) | . 053 | . 004 |
Net Realized and Unrealized Gain (Loss) on Investments | 1.052 | .226 |
Total from Investment Operations | 1.105 | .230 |
Distributions | ||
Dividends from Net Investment Income | (.095) | — |
Distributions from Realized Capital Gains | — | — |
Total Distributions | (. 095) | — |
Net Asset Value, End of Period | $21.24 | $20.23 |
Total Return2 | 5.48% | 1.15% |
Ratios/Supplemental Data | ||
Net Assets, End of Period (Millions) | $167 | $159 |
Ratio of Total Expenses to Average Net Assets | ||
Based on Total Expenses3 | 0.75% | 0.73% 4 |
Net of Dividend and Borrowing Expense on Securities Sold Short | 0.36% | 0.36%4 |
Ratio of Net Investment Income (Loss) to Average Net Assets | 0.53% | 0.09%4 |
Portfolio Turnover Rate | 84% | 25% |
The expense ratio, net income ratio, and turnover rate for the current period have been annualized. | ||
1 Inception. 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 2016 dividend and borrowing expense on securities sold short of 0.38% and 0.01%, respectively. Includes 2015 dividend and borrowing expense on securities sold short of 0.34% and 0.03%, respectively. 4 Annualized. | ||
See accompanying Notes, which are an integral part of the Financial Statements.
21
Alternative Strategies Fund
Notes to Consolidated Financial Statements
Vanguard Alternative Strategies Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
The Consolidated Financial Statements include Vanguard ASF Portfolio (“the subsidiary”), which commenced operations on August 11, 2015. The subsidiary is wholly owned by the fund and is a unit trust established in the Cayman Islands under the Trusts Law (2011 Revision) of the Cayman Islands, which is organized to invest in certain commodity-linked investments on behalf of the fund, consistent with the fund’s investment objectives and policies. The commodity-linked investments and other investments held by the subsidiary are subject to the same risks that apply to similar investments if held directly by the fund. As of April 30, 2016, the fund held $9,479,000 in the subsidiary, representing 6% of the fund’s net assets. All inter-fund transactions and balances (including the fund’s investment in the subsidiary) have been eliminated, and the Consolidated Financial Statements include all investments and other accounts of the subsidiary as if held directly by the fund. A summary of the subsidiary’s financial information is presented below.
Amount | |
Subsidiary Financial Statement Information | ($000) |
Total Assets | 10,227 |
Total Liabilities | (748) |
Net Assets | 9,479 |
Net Investment Income (Loss) | (28) |
Realized Net Gain (Loss) | 4,505 |
Change in Unrealized Appreciation (Depreciation) | (3,110) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,367 |
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 acquired over 60 days to maturity 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. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the
22
Alternative Strategies Fund
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. Futures Contracts: The fund gains exposure to commodities through the subsidiary’s investment in exchange-traded commodity futures contracts. The primary risk associated with the use of commodity futures contracts is the chance the fund could lose all, or substantially all, of its investments in instruments linked to the returns of commodity futures. Commodity futures trading is volatile, and even a small movement in market prices could cause large losses. The fund also uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Consolidated Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Consolidated Statement of Assets and Liabilities as an asset (liability) and in the Consolidated Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the six months ended April 30, 2016, the fund’s average investments in long and short futures contracts represented 106% and 19% of net assets, respectively.
4. Forward Currency Contracts: The fund enters into forward currency contracts to enhance returns and 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 counter-parties to transfer collateral as security for their performance. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets 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 Consolidated Statement of
23
Alternative Strategies Fund
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 Consolidated Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Consolidated Statement of Assets and Liabilities as an asset (liability) and in the Consolidated 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 six months ended April 30, 2016, the fund’s average investment in forward currency contracts represented 4% of net assets, based on the average of notional amounts at each quarter-end during the period.
5. Short Sales: Short sales are the sales of securities that the fund does not own. The fund sells a security it does not own in anticipation of a decline in the value of that security. In order to deliver the security to the purchaser, the fund borrows the security from a broker-dealer. The fund must segregate, as collateral for its obligation to return the borrowed security, an amount of cash and long security positions at least equal to the market value of the security sold short. This results in the fund holding a significant portion of its assets in cash. The fund later closes out the position by returning the security to the lender, typically by purchasing the security in the open market. A gain, limited to the price at which the fund sold the security short, or a loss, theoretically unlimited in size, is recognized upon the termination of the short sale. The fund may receive a portion of the income from the investment of collateral, or be charged a fee on borrowed securities, based on the market value of each borrowed security and a variable rate that is dependent upon the availability of such security. The net amounts of income or fees are recorded as interest income (for net income received) or borrowing expense on securities sold short (for net fees charged) on the Consolidated Statement of Operations. Dividends on securities sold short are reported as an expense in the Consolidated Statement of Operations. Cash collateral segregated for securities sold short is recorded as an asset in the Consolidated Statement of Assets and Liabilities. Long security positions segregated as collateral are shown in the Consolidated Statement of Net Assets.
6. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The subsidiary is classified as a foreign corporation for U.S. tax purposes, and because it does not carry on a U.S. trade or business, is generally not subject to U.S. federal income tax. The subsidiary also complies with the Foreign Account Tax Compliance Act (“FATCA”) and thus will not be subject to 30% withholding under FATCA on any income from U.S. investments. In addition, the subsidiary is not subject to Cayman Islands income tax. The subsidiary will distribute any earnings and profits to the fund each year, and such income will be qualifying income to the fund. Management has analyzed the fund’s tax positions taken for its open federal income tax period ended October 31, 2015, and for the period ended April 30, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
7. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
24
Alternative Strategies Fund
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Consolidated 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 April 30, 2016, or at any time during the period then ended.
9. Other: Dividend income (or dividend expenses on short positions) is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of 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 Consolidated Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2016, the fund had contributed to Vanguard capital in the amount of $15,000, representing 0.01% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 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).
25
Alternative Strategies Fund
The following table summarizes the market value of the fund’s investments as of April 30, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—Long Positions | 97,839 | 8,179 | 32 |
Common Stocks Sold Short | (34,715) | — | — |
Temporary Cash Investments | 29,518 | 8,846 | — |
Futures Contracts—Assets1 | 406 | — | — |
Futures Contracts—Liabilities1 | (741) | — | — |
Forward Currency Contracts—Assets | — | 1,542 | — |
Forward Currency Contracts—Liabilities | — | (610) | — |
Total | 92,307 | 17,957 | 32 |
1 Represents variation margin on the last day of the reporting period. |
D. At April 30, 2016, the fair values of derivatives were reflected in the Consolidated Statement of Assets and Liabilities as follows:
Foreign | ||||
Commodity | Interest Rate | Exchange | ||
Statement of Assets | Contracts | Contracts | Contracts | Total |
and Liabilities Caption | ($000) | ($000) | ($000) | ($000) |
Other Assets | 341 | 65 | 1,542 | 1,948 |
Other Liabilities | (741) | — | (610) | (1,351) |
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended April 30, 2016, were:
Foreign | ||||
Commodity | Interest Rate | Exchange | ||
Contracts | Contracts | Contracts | Total | |
Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) | ($000) |
Futures Contracts | 4,505 | 1,166 | — | 5,671 |
Forward Currency Contracts | — | — | 263 | 263 |
Realized Net Gain (Loss) on Derivatives | 4,505 | 1,166 | 263 | 5,934 |
Change in Unrealized Appreciation | ||||
(Depreciation) on Derivatives | ||||
Futures Contracts | (3,110) | (169) | — | (3,279) |
Forward Currency Contracts | — | — | 170 | 170 |
Change in Unrealized Appreciation | ||||
(Depreciation) on Derivatives | (3,110) | (169) | 170 | (3,109) |
26
Alternative Strategies Fund
At April 30, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
($000) | ||||
Aggregate | ||||
Number of | Settlement | Unrealized | ||
Long (Short) | Value | Appreciation | ||
Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
2-Year U.S. Treasury Note | June 2016 | 496 | 108,438 | (110) |
5-Year U.S. Treasury Note | June 2016 | 212 | 25,634 | (52) |
10-Year U.S. Treasury Note | June 2016 | 127 | 16,518 | (83) |
Sugar #111 | June 2016 | (232) | (4,241) | (433) |
LME Nickel1 | June 2016 | 74 | 4,186 | 269 |
Low Sulphur Gas Oil1 | June 2016 | (101) | (4,181) | (489) |
Cocoa1 | July 2016 | 129 | 4,171 | 232 |
LME Lead1 | June 2016 | 92 | 4,150 | 210 |
Lean Hogs1 | June 2016 | (126) | (4,118) | (225) |
WTI Crude Oil1 | June 2016 | (88) | (4,109) | (379) |
Cotton No. 21 | July 2016 | 128 | 4,081 | 286 |
LME Tin1 | June 2016 | 47 | 4,055 | 4 |
LME Copper1 | June 2016 | 32 | 4,046 | 210 |
NY Harbor ULSD1 | May 2016 | (69) | (4,017) | (460) |
RBOB Gasoline1 | May 2016 | (59) | (3,976) | (309) |
KC Hard Red Winter Wheat1 | July 2016 | (165) | (3,948) | (108) |
Natural Gas1 | May 2016 | (181) | (3,942) | (293) |
Feeder Cattle1 | May 2016 | 55 | 3,862 | (289) |
Live Cattle1 | June 2016 | 81 | 3,724 | (445) |
(2,464) | ||||
1 Security is owned by the subsidiary. |
Unrealized appreciation (depreciation) on open futures contracts, except LME Nickel, LME Lead, LME
Tin, and LME Copper contracts, is required to be treated as realized gain (loss) for tax purposes.
27
Alternative Strategies Fund
At April 30, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts, except for Singapore dollar contracts, is treated as realized gain (loss) for tax purposes.
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
Bank of America, N.A. | 5/6/16 | NOK | 174,328 | USD | 21,034 | 616 |
Bank of America, N.A. | 5/6/16 | AUD | 27,541 | USD | 21,012 | (76) |
Bank of America, N.A. | 5/6/16 | CAD | 27,226 | USD | 20,795 | 905 |
Bank of America, N.A. | 5/6/16 | HKD | 5,105 | USD | 658 | — |
Bank of America, N.A. | 5/6/16 | USD | 24,840 | EUR | 21,807 | (135) |
Bank of America, N.A. | 5/6/16 | USD | 21,309 | SEK | 172,648 | (195) |
Bank of America, N.A. | 5/6/16 | USD | 20,900 | CHF | 20,025 | 20 |
Bank of America, N.A. | 5/6/16 | USD | 2,348 | CAD | 3,076 | (104) |
Bank of America, N.A. | 5/6/16 | USD | 1,513 | CHF | 1,459 | (9) |
Bank of America, N.A. | 5/6/16 | USD | 1,249 | GBP | 878 | (33) |
Bank of America, N.A. | 5/6/16 | USD | 929 | NOK | 7,710 | (29) |
Bank of America, N.A. | 5/9/16 | USD | 731 | JPY | 80,430 | (25) |
Bank of America, N.A. | 5/6/16 | USD | 714 | SGD | 966 | (4) |
Bank of America, N.A. | 5/6/16 | USD | 658 | HKD | 5,105 | — |
Bank of America, N.A. | 5/6/16 | USD | 149 | SGD | 199 | 1 |
932 | ||||||
AUD—Australian dollar. | ||||||
CAD—Canadian dollar. | ||||||
CHF—Swiss franc. | ||||||
EUR—Euro. | ||||||
GBP—British pound. | ||||||
HKD—Hong Kong dollar. | ||||||
JPY—Japanese yen. | ||||||
NOK—Norwegian krone. | ||||||
SEK—Swedish krona. | ||||||
SGD—Singapore dollar. | ||||||
USD—U.S. dollar. |
At April 30, 2016, the counterparty had deposited in segregated accounts securities with a value of $1,299,000 in connection with amounts due to the fund for open forward currency contracts.
28
Alternative Strategies Fund
The following table summarizes the fund’s derivative assets and liabilities by counterparty for derivatives subject to arrangements that provide for offsetting assets and liabilities. Exchange-traded derivatives are listed separately.
Assets | Liabilities | Amounts Not Offset in | ||||
Reflected in | Reflected in | the Consolidated | ||||
Consolidated | Consolidated | Statement of Assets | Net | |||
Statement of | Statement of | Net Amount | and Liabilities | Exposure 3 | ||
Assets and | Assets and | Receivable | Collateral | Collateral | (Not Less | |
Liabilities1 | Liabilities1 | (Payable) | Pledged 2 | Received 2 | Than $0) | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Forwards Subject to | ||||||
Offsetting Arrangements, | ||||||
by Counterparty | ||||||
Bank of America, N.A. | 1,542 | (610) | 932 | — | 1,299 | — |
Exchange—Traded Futures | ||||||
Contracts | 65 | — | 65 | — | — | 65 |
Exchange—Traded Commodity | ||||||
Futures Contracts | 341 | (741) | (400) | 6,900 | — | — |
Total | 1,948 | (1,351) | 597 | 6,900 | 1,299 | 65 |
1 Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities. 2 Securities or other assets pledged as collateral are noted in the Consolidated Statement of Assets and Liabilities. Securities or other assets received as collateral are held in a segregated account and not included in the fund’s security holdings in the Consolidated Statement of Assets and Liabilities. 3 Net Exposure represents the net amount receivable from the counterparty in the event of default. Counterparties are not required to exchange collateral if amount is below a specified minimum transfer amount. | ||||||
E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; such differences are primarily attributed to mark-to-market of open futures and forwards contracts. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2016, the fund realized net foreign currency gains of $22,000, which increased distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized gains to overdistributed net investment income.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2015, the fund had available capital losses totaling $838,000 that may be carried forward indefinitely to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2016; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
29
Alternative Strategies Fund
At April 30, 2016, the cost of long security positions for tax purposes was $141,779,000. Net unrealized appreciation of long security positions for tax purposes was $2,635,000, consisting of unrealized gains of $4,624,000 on securities that had risen in value since their purchase and $1,989,000 in unrealized losses on securities that had fallen in value since their purchase. Tax-basis net unrealized appreciation on securities sold short was $1,892,000, consisting of unrealized gains of $3,803,000 on securities that had fallen in value since their purchase and $1,911,000 in unrealized losses on securities that had risen in value since their sale.
F. During the six months ended April 30, 2016, the fund purchased $70,878,000 of investment securities and sold $49,624,000 of investment securities, other than temporary cash investments. The proceeds of short sales and the cost of purchases to cover short sales were $28,912,000 and $28,224,000, respectively.
G. Capital shares issued and redeemed were:
Six Months Ended | August 11, 20151 to | |
April 30, 2016 | October 31, 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 559 | 8,100 |
Issued in Lieu of Cash Distributions | 36 | — |
Redeemed | (592) | (251) |
Net Increase (Decrease) in Shares Outstanding | 3 | 7,849 |
1 Inception. |
At April 30, 2016, Vanguard Managed Payout Fund was the record or beneficial owner of 93% of the fund’s net assets.
H. Management has determined that no material events or transactions occurred subsequent to April 30, 2016, that would require recognition or disclosure in these financial statements.
30
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.
31
Six Months Ended April 30, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Alternative Strategies Fund | 10/31/2015 | 4/30/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,054.78 | $3.83 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,021.13 | 3.77 |
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 was 0.75%. 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 (182/366). | |||
32
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Alternative Strategies Fund has renewed the fund’s advisory arrangement with The Vanguard Group, Inc. (Vanguard)—through its Quantitative Equity Group. The board determined that continuing the fund’s internalized management structure was in the best interest of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the investment management services provided since the fund’s inception in 2015 and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. The Quantitative Equity Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the performance of the fund since its inception, including any periods of outperformance or underperformance relative to a benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue. Information about the fund’s performance since inception can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer group average. Information about the fund’s expense ratio appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section.
The board did not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees and produces “profits” only in the form of reduced expenses for fund shareholders.
The benefit of economies of scale
The board concluded that the fund’s at-cost arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
33
Glossary
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
34
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. 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.
InterestedTrustee1 | Rajiv L. Gupta |
Born 1945. Trustee Since December 2001.2 Principal | |
F. William McNabb III | Occupation(s) During the Past Five Years and Other |
Born 1957. Trustee Since July 2009. Chairman of | Experience: Chairman and Chief Executive Officer |
the Board. Principal Occupation(s) During the Past | (retired 2009) and President (2006–2008) of |
Five Years and Other Experience: Chairman of the | Rohm and Haas Co. (chemicals); Director of Tyco |
Board of The Vanguard Group, Inc., and of each of | International plc (diversified manufacturing and |
the investment companies served by The Vanguard | services), HP Inc. (printer and personal computer |
Group, since January 2010; Director of The Vanguard | manufacturing), and Delphi Automotive plc |
Group since 2008; Chief Executive Officer and | (automotive components); Senior Advisor at |
President of The Vanguard Group, and of each of | New Mountain Capital. |
the investment companies served by The Vanguard | |
Group, since 2008; Director of Vanguard Marketing | Amy Gutmann |
Corporation; Managing Director of The Vanguard | Born 1949. Trustee Since June 2006. Principal |
Group (1995–2008). | Occupation(s) During the Past Five Years and |
Other Experience: President of the University of | |
IndependentTrustees | Pennsylvania; Christopher H. Browne Distinguished |
Professor of Political Science, School of Arts and | |
Emerson U. Fullwood | Sciences, and Professor of Communication, Annenberg |
Born 1948. Trustee Since January 2008. Principal | School for Communication, with secondary faculty |
Occupation(s) During the Past Five Years and Other | appointments in the Department of Philosophy, School |
Experience: Executive Chief Staff and Marketing | of Arts and Sciences, and at the Graduate School of |
Officer for North America and Corporate Vice President | Education, University of Pennsylvania; Trustee of the |
(retired 2008) of Xerox Corporation (document manage- | National Constitution Center; Chair of the Presidential |
ment products and services); Executive in Residence | Commission for the Study of Bioethical Issues. |
and 2009–2010 Distinguished Minett Professor at | |
the Rochester Institute of Technology; Lead Director | JoAnn Heffernan Heisen |
of SPX FLOW, Inc. (multi-industry manufacturing); | Born 1950. Trustee Since July 1998. Principal |
Director of the United Way of Rochester, the University | Occupation(s) During the Past Five Years and |
of Rochester Medical Center, Monroe Community | Other Experience: Corporate Vice President and |
College Foundation, North Carolina A&T University, | Chief Global Diversity Officer (retired 2008) and |
and Roberts Wesleyan College. | Member of the Executive Committee (1997–2008) |
of Johnson & Johnson (pharmaceuticals/medical | |
devices/consumer products); Director of Skytop | |
Lodge Corporation (hotels) and the Robert Wood | |
Johnson Foundation; Member of the Advisory | |
Board of the Institute for Women’s Leadership | |
at Rutgers University. |
F. Joseph Loughrey | Executive Officers | |
Born 1949. Trustee Since October 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Glenn Booraem | |
Experience: President and Chief Operating Officer | Born 1967. Treasurer Since May 2015. Principal | |
(retired 2009) of Cummins Inc. (industrial machinery); | Occupation(s) During the Past Five Years and | |
Chairman of the Board of Hillenbrand, Inc. (specialized | Other Experience: Principal of The Vanguard Group, | |
consumer services), and of Oxfam America; Director | Inc.; Treasurer of each of the investment companies | |
of SKF AB (industrial machinery), Hyster-Yale Materials | served by The Vanguard Group; Controller of each of | |
Handling, Inc. (forklift trucks), the Lumina Foundation | the investment companies served by The Vanguard | |
for Education, and the V Foundation for Cancer | Group (2010–2015); Assistant Controller of each of | |
Research; Member of the Advisory Council for the | the investment companies served by The Vanguard | |
College of Arts and Letters and of the Advisory Board | Group (2001–2010). | |
to the Kellogg Institute for International Studies, both | ||
at the University of Notre Dame. | Thomas J. Higgins | |
Born 1957. Chief Financial Officer Since September | ||
Mark Loughridge | 2008. Principal Occupation(s) During the Past Five | |
Born 1953. Trustee Since March 2012. Principal | Years and Other Experience: Principal of The Vanguard | |
Occupation(s) During the Past Five Years and Other | Group, Inc.; Chief Financial Officer of each of the | |
Experience: Senior Vice President and Chief Financial | investment companies served by The Vanguard Group; | |
Officer (retired 2013) at IBM (information technology | Treasurer of each of the investment companies served | |
services); Fiduciary Member of IBM’s Retirement Plan | by The Vanguard Group (1998–2008). | |
Committee (2004–2013); Director of the Dow Chemical | ||
Company; Member of the Council on Chicago Booth. | Peter Mahoney | |
Born 1974. Controller Since May 2015. Principal | ||
Scott C. Malpass | Occupation(s) During the Past Five Years and | |
Born 1962. Trustee Since March 2012. Principal | Other Experience: Head of Global Fund Accounting | |
Occupation(s) During the Past Five Years and Other | at The Vanguard Group, Inc.; Controller of each of the | |
Experience: Chief Investment Officer and Vice | investment companies served by The Vanguard Group; | |
President at the University of Notre Dame; Assistant | Head of International Fund Services at The Vanguard | |
Professor of Finance at the Mendoza College of | Group (2008–2014). | |
Business at Notre Dame; Member of the Notre Dame | ||
403(b) Investment Committee, the Board of Advisors | Heidi Stam | |
for Spruceview Capital Partners, and the Investment | Born 1956. Secretary Since July 2005. Principal | |
Advisory Committee of Major League Baseball; Board | Occupation(s) During the Past Five Years and Other | |
Member of TIFF Advisory Services, Inc., and Catholic | Experience: Managing Director of The Vanguard | |
Investment Services, Inc. (investment advisors). | Group, Inc.; General Counsel of The Vanguard Group; | |
Secretary of The Vanguard Group and of each of the | ||
André F. Perold | investment companies served by The Vanguard Group; | |
Born 1952. Trustee Since December 2004. Principal | Director and Senior Vice President of Vanguard | |
Occupation(s) During the Past Five Years and Other | Marketing Corporation. | |
Experience: George Gund Professor of Finance and | ||
Banking, Emeritus at the Harvard Business School | Vanguard Senior ManagementTeam | |
(retired 2011); Chief Investment Officer and Managing | ||
Partner of HighVista Strategies LLC (private investment | Mortimer J. Buckley | James M. Norris |
firm); Director of Rand Merchant Bank; Overseer of | Kathleen C. Gubanich | Thomas M. Rampulla |
the Museum of Fine Arts Boston. | Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi | |
Peter F. Volanakis | Chris D. McIsaac | |
Born 1955. Trustee Since July 2009. Principal | ||
Occupation(s) During the Past Five Years and Other | Chairman Emeritus and Senior Advisor | |
Experience: President and Chief Operating Officer | ||
(retired 2010) of Corning Incorporated (communications | John J. Brennan | |
equipment); Trustee of Colby-Sawyer College and | Chairman, 1996–2009 | |
Chairman of its Finance and Enrollment Committee; | Chief Executive Officer and President, 1996–2008 | |
Member of the Advisory Board of the Norris Cotton | ||
Cancer Center. | Founder | |
John C. Bogle | ||
Chairman and Chief Executive Officer, 1974–1996 |
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600 | ||
Valley Forge, PA 19482-2600 | ||
Connect with Vanguard® > vanguard.com | ||
Fund Information > 800-662-7447 | CFA® is a registered trademark owned by CFA Institute. | |
Direct Investor Account Services > 800-662-2739 | ||
Institutional Investor Services > 800-523-1036 | ||
Text Telephone for People | ||
Who Are Deaf or Hard of Hearing> 800-749-7273 | ||
This material may be used in conjunction | ||
with the offering of shares of any Vanguard | ||
fund only if preceded or accompanied by | ||
the fund’s current prospectus. | ||
All comparative mutual fund data are from Lipper, a | ||
Thomson Reuters Company, or Morningstar, Inc., unless | ||
otherwise noted. | ||
You can obtain a free copy of Vanguard’s proxy voting | ||
guidelines by visiting vanguard.com/proxyreporting or by | ||
calling Vanguard at 800-662-2739. The guidelines are | ||
also available from the SEC’s website, sec.gov. In | ||
addition, you may obtain a free report on how your fund | ||
voted the proxies for securities it owned during the 12 | ||
months ended June 30. To get the report, visit either | ||
vanguard.com/proxyreporting or sec.gov. | ||
You can review and copy information about your fund at | ||
the SEC’s Public Reference Room in Washington, D.C. To | ||
find out more about this public service, call the SEC at | ||
202-551-8090. Information about your fund is also | ||
available on the SEC’s website, and you can receive | ||
copies of this information, for a fee, by sending a | ||
request in either of two ways: via email addressed to | ||
publicinfo@sec.gov or via regular mail addressed to the | ||
Public Reference Section, Securities and Exchange | ||
Commission, Washington, DC 20549-1520. | ||
© 2016 The Vanguard Group, Inc. | ||
All rights reserved. | ||
Vanguard Marketing Corporation, Distributor. | ||
Q12982 062016 |
Item 2: Code of Ethics.
Not Applicable.
Item 3: Audit Committee Financial Expert.
Not Applicable.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Not Applicable.
Item 5: Audit Committee of Listed Registrants.
Not Applicable.
Item 6: Investments.
Not Applicable.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not Applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not Applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not Applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Exhibits. (a) Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD TRUSTEES’ EQUITY FUND | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: June 15, 2016 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
VANGUARD TRUSTEES’ EQUITY FUND | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: June 15, 2016 |
VANGUARD TRUSTEES’ EQUITY FUND | |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER | |
Date: June 15, 2016 |
* By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on April 22, 2014 see file Number 2-17620, Incorporated by Reference.