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: | Anne E. Robinson, Esquire | |
P.O. Box 876 | ||
Valley Forge, PA 19482 | ||
Registrant’s telephone number, including area code: (610) 669-1000 | ||
Date of fiscal year end: October 31 | ||
Date of reporting period: November 1, 2017—April 30, 2018 | ||
Item 1: Reports to Shareholders |
Semiannual Report | April 30, 2018
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 Performance at a Glance. | 1 |
CEO’s Perspective. | 2 |
Advisors’ Report. | 4 |
Results of Proxy Voting. | 8 |
Fund Profile. | 10 |
Performance Summary. | 12 |
Financial Statements. | 13 |
About Your Fund’s Expenses. | 29 |
Trustees Approve Advisory Arrangements. | 31 |
Glossary. | 33 |
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard International Value Fund returned 3.46% for the six months ended April 30, 2018, essentially matching its benchmark’s result and ahead of the average return of its peers.
• The fund’s three advisors primarily invest in undervalued stocks from the developed markets of Europe and the Pacific region as well as emerging markets.
• The fund’s Pacific portfolio had the strongest performance, returning more than 6% and surpassing that of the benchmark’s Pacific stocks. Holdings in Singapore, Australia, Hong Kong, and South Korea outperformed. Selections in Japan, the largest country holding, fell short of those in the benchmark.
• Results in Europe were also positive, most notably in the Netherlands and Norway.
• In terms of relative performance, the fund’s selections in the energy, financial, consumer discretionary, and industrial sectors contributed most. Selection was weakest in health care.
Total Returns: Six Months Ended April 30, 2018 | |
Total | |
Returns | |
Vanguard International Value Fund | 3.46% |
MSCI All Country World Index ex USA | 3.47 |
International Funds Average | 2.70 |
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
International Value Fund | 0.40% | 1.31% |
The fund expense ratio shown is from the prospectus dated February 22, 2018, and represents estimated costs for the current fiscal year.
For the six months ended April 30, 2018, the fund’s annualized expense ratio was 0.39%. The peer-group expense ratio is derived from
data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.
Peer group: International Funds.
1
CEO’s Perspective
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.
Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority
2
front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make
Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
May 16, 2018
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2018 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 3.83% | 13.17% | 12.84% |
Russell 2000 Index (Small-caps) | 3.27 | 11.54 | 11.74 |
Russell 3000 Index (Broad U.S. market) | 3.79 | 13.05 | 12.75 |
FTSE All-World ex US Index (International) | 3.72 | 15.84 | 5.85 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | -1.87% | -0.32% | 1.47% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.97 | 1.56 | 2.44 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.67 | 1.16 | 0.32 |
CPI | |||
Consumer Price Index | 1.57% | 2.46% | 1.50% |
3
Advisors’ Report
For the six months ended April 30, 2018, Vanguard International Value Fund returned 3.46%. 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 17, 2018.
Please note that one of the fund’s advisors, Edinburgh Partners Limited, is now a wholly owned subsidiary of Franklin Resources, Inc., operating as Franklin Templeton Investments. There is no change to Edinburgh Partners’ investment approach, and Sandy Nairn continues to manage Edinburgh Partners’ portion of the fund.
Vanguard International Value Fund Investment Advisors | |||
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Lazard Asset Management LLC | 39 | 4,050 | 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 | 34 | 3,578 | 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, | 24 | 2,561 | 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 | 3 | 265 | 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. |
4
Lazard Asset Management LLC
Portfolio Managers:
Michael G. Fry, Managing Director
Michael A. Bennett, CPA,
Managing Director
After a year of steady gains and historically low volatility, global equities fell sharply from all-time highs in late January as investors reacted to prospects of higher long-term interest rates and, more recently, to the deteriorating global trade environment. Volatility jumped to multiyear levels, though underlying global growth and corporate earnings indicators remained strong. The period’s uncertainty raised investor awareness of risk and emphasized the importance of fundamentals, resulting in an environment that favored skilled stock selection.
Stock selection in the consumer discretionary sector helped relative returns as shares of Ryohin Keikaku, a Japanese discounter, outperformed. During the first quarter, the company posted better-than-expected revenue and profits as its domestic margin trended well ahead of expectations on less discounting and a better product mix. Elsewhere in the sector, South African retailer Mr Price Group experienced strong sales growth while providing guidance for an improvement in gross margins. In financials, DBS Group, Singapore’s largest bank, reported strong net interest margins and raised its dividend, in addition to producing a special dividend.
In contrast, British American Tobacco fell, hurting performance in consumer staples. It initially declined in February because investors sold high-dividend stocks as long-term interest rates rose. More recently, the stock continued to lag because its earnings announcement led to small consensus downgrades, mainly because of currency impact.
Given the rising uncertainty and volatility in the markets, we believe investors will continue to focus on high-quality companies with defensible business models, consistent cash flows that generate superior financial productivity, and attractive valuations. Many of these opportunities can be found in the international equity markets, given their discounted valuations relative to U.S. equities. The pace of improvements in company fundamentals has accelerated outside the U.S., a function of accelerating margin improvement as well as the pickup in global economic growth and cheaper currencies.
We believe the portfolio is well-positioned for this market environment. The companies we own, with their consistently high financial productivity driven by barriers to entry and sustainable competitive advantages, are poised to benefit as investors continue to return to corporate fundamentals.
5
Edinburgh Partners Limited
Portfolio Manager:
Sandy Nairn, Investment Partner,
Director, and CEO
Over the period, market volatility rose in line with the unfolding rhetoric over trade and the ebb and flow of tensions over the Korean Peninsula. Economic growth was robust, but bond markets found it increasingly difficult to ignore evidence of wage pressures and inflation. The small market gains over the period masked significant moves in both directions.
The biggest contribution to portfolio performance came from bank holdings, which were supported by the potential phasing out of quantitative easing and a more normal monetary environment. This was followed by energy exposure as oil and gas prices rallied. We expect both of these to continue, albeit with bumps along the road.
Two major contributors were Tesco and Gemalto. Tesco, a U.K.-based retailer, has begun to show evidence that its recovery strategy is working, with better same-store sales growth and more stable pricing. This caused a marked move in the share price, given the negative sentiment surrounding the company. Although the announced merger between supermarkets
Asda and Sainsburys could have an impact if approved, we believe the disruption this will cause the two businesses will create opportunities for Tesco. Gemalto, a digital security company based in Amsterdam, had issued a series of profit warnings as the result of slow adoption of and increased inventories in mobile payments, along with a slowdown in its SIM-card business. Competitors took advantage, and in December the company accepted an acquisition offer from French aerospace and defense company Thales.
On the negative side, the holding in Alps Electric has been weak because of its supplier relationship to Apple and slow iPhone X sales. We see this as an opportunity to further build our positions.
We do not anticipate dramatic shifts in the portfolio, but with the weakness in some telecommunications companies we are beginning to see opportunities to increase our exposure. Although the companies’ revenue growth is relatively pedestrian, valuations are reasonable given the strong cash flow and distributions to shareholders.
Overall, we are comfortable with the portfolio’s structure, and we do not anticipate dramatic shifts in the coming months. We expect volatility to return, as we see inflation as a recurring topic that will periodically upset markets.
6
ARGA Investment Management, LP
Portfolio Managers:
A. Rama Krishna, CFA, Founder and
Chief Investment Officer
Steven Morrow, CFA, Director of Research
International equity markets rose over the six months amid favorable market drivers that included signs of synchronized global growth and a generally benign inflationary environment.
Our favorable performance across many portfolio sectors and geographies reflects our strict value-investing discipline. Using initial screens and fundamental research, we identify companies with strong franchises and downside protection that trade at discounted prices. Often the result of temporary macroeconomic, industry, or company stress, these discounts tend to reverse over time, generating superior investor returns.
Going into the period, we had a sizable energy exposure from purchases made at discounted prices after oil prices collapsed. Our analysis of oil industry trends and cost structure suggested that the lower prices would elicit supply-and-demand responses, driving partial price recovery, and that industry returns would further recover as companies cut costs and reduced investment. Over the ensuing period, global crude inventories declined, oil prices rebounded, and many energy companies cut costs. As expected, these factors drove strong recovery in returns and market values of many portfolio energy holdings.
Consumer staples and industrial stocks, evidencing similar stress reduction and valuation recovery, modestly contributed to portfolio performance.
Before the period’s start, global Brexit concerns provided an opportunity to buy a variety of U.K. companies at sharply discounted prices. Our research showed many to be industry leaders with sustainable competitive advantages. With markets overly focused on near-term uncertainties, we believe these valuations are currently underappreciated and will recover with the U.K. economy.
Our current portfolio positioning also reflects new company-specific valuation opportunities across sectors and geographies. In particular, we increased Japanese technology and U.K. consumer discretionary holdings. To fund new exposures, we trimmed or exited several Japanese and European industrial positions whose valuations had become less attractive.
Despite strong performance by international equities over the past few years, we continue to find compelling valuations created by temporary stress. As the business stressors subside and fundamentals recover, we expect strong contributions to portfolio returns over time.
7
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 254,575,796 | 8,033,187 | 96.9% |
Emerson U. Fullwood | 254,454,697 | 8,154,286 | 96.9% |
Amy Gutmann | 254,177,462 | 8,431,521 | 96.8% |
JoAnn Heffernan Heisen | 254,714,031 | 7,894,951 | 97.0% |
F. Joseph Loughrey | 254,633,918 | 7,975,065 | 97.0% |
Mark Loughridge | 254,534,475 | 8,074,507 | 96.9% |
Scott C. Malpass | 254,514,046 | 8,094,936 | 96.9% |
F. William McNabb III | 254,640,222 | 7,968,761 | 97.0% |
Deanna Mulligan | 254,832,344 | 7,776,639 | 97.0% |
André F. Perold | 253,863,549 | 8,745,433 | 96.7% |
Sarah Bloom Raskin | 254,398,748 | 8,210,235 | 96.9% |
Peter F. Volanakis | 254,609,402 | 7,999,581 | 97.0% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
International Value Fund | 164,434,315 | 7,276,619 | 4,291,799 | 18,653,558 | 84.5% |
8
Fund shareholders did not approve the following proposal:
Proposal 7—Institute transparent procedures to avoid holding investments in companies that, in management’s judgment, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights. Such procedures may include time-limited engagement with problem companies if management believes that their behavior can be changed.
The trustees recommended a vote against the proposal for the following reasons: (1) Vanguard is fully compliant with all applicable U.S. laws and regulations that prohibit the investment in any company owned or controlled by the government of Sudan; (2) the addition of further investment constraints is not in fund shareholders’ best interests if those constraints are unrelated to a fund’s stated investment objective, policies, and strategies; and (3) divestment is an ineffective means to implement social change, as it often puts the shares into the hands of another owner with no direct impact to the company’s capitalization.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
International Value Fund | 35,379,012 | 13,365,652 | 127,258,069 | 18,653,558 | 18.2% |
9
International Value Fund
Fund Profile
As of April 30, 2018
Portfolio Characteristics | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Number of Stocks | 155 | 1,862 |
Median Market Cap | $42.9B | $36.0B |
Price/Earnings Ratio | 14.1x | 14.6x |
Price/Book Ratio | 1.6x | 1.7x |
Return on Equity | 12.1% | 12.6% |
Earnings Growth | ||
Rate | 5.3% | 9.6% |
Dividend Yield | 2.8% | 2.8% |
Turnover Rate | ||
(Annualized) | 29% | — |
Ticker Symbol | VTRIX | — |
Expense Ratio1 | 0.40% | — |
Short-Term Reserves | 3.3% | — |
Sector Diversification (% of equity exposure) | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Consumer Discretionary | 12.4% | 11.4% |
Consumer Staples | 6.4 | 9.3 |
Energy | 10.1 | 7.1 |
Financials | 23.9 | 23.0 |
Health Care | 10.2 | 7.6 |
Industrials | 11.8 | 11.8 |
Information Technology | 14.9 | 11.5 |
Materials | 2.5 | 8.1 |
Real Estate | 2.2 | 3.2 |
Telecommunication Services | 4.0 | 4.0 |
Utilities | 1.6 | 3.0 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Volatility Measures | |
MSCI AC | |
World Index | |
ex USA | |
R-Squared | 0.96 |
Beta | 0.95 |
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) | ||
BP plc | Integrated Oil & Gas | 2.0% |
DBS Group Holdings | ||
Ltd. | Diversified Banks | 1.9 |
Royal Dutch Shell plc | Integrated Oil & Gas | 1.8 |
Novartis AG | Pharmaceuticals | 1.8 |
TOTAL SA | Integrated Oil & Gas | 1.6 |
Sumitomo Mitsui | ||
Financial Group Inc. | Diversified Banks | 1.5 |
Samsung Electronics Co. Technology | ||
Ltd. | Hardware, Storage & | |
Peripherals | 1.4 | |
Sanofi | Pharmaceuticals | 1.4 |
Roche Holding AG | Pharmaceuticals | 1.3 |
ICICI Bank Ltd. | Diversified Banks | 1.3 |
Top Ten | 16.0% | |
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 22, 2018, and represents estimated costs for the current fiscal year. For
the six months ended April 30, 2018, the annualized expense ratio was 0.39%.
10
International Value Fund
Market Diversification (% of equity exposure) | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Europe | ||
United Kingdom | 17.8% | 12.2% |
France | 7.2 | 7.7 |
Switzerland | 5.8 | 5.2 |
Germany | 5.2 | 6.7 |
Spain | 3.6 | 2.2 |
Netherlands | 2.8 | 2.5 |
Norway | 1.7 | 0.5 |
Finland | 1.6 | 0.7 |
Italy | 1.3 | 1.8 |
Sweden | 1.1 | 1.7 |
Other | 2.0 | 2.8 |
Subtotal | 50.1% | 44.0% |
Pacific | ||
Japan | 20.2% | 16.7% |
Singapore | 2.8 | 1.0 |
South Korea | 2.8 | 3.9 |
Hong Kong | 2.4 | 2.5 |
Australia | 1.6 | 4.5 |
Other | 0.0 | 0.1 |
Subtotal | 29.8% | 28.7% |
Emerging Markets | ||
China | 5.0% | 7.5% |
India | 1.9 | 2.1 |
Brazil | 1.6 | 1.8 |
Taiwan | 1.5 | 2.8 |
Thailand | 1.1 | 0.6 |
Russia | 1.1 | 0.8 |
Indonesia | 1.0 | 0.5 |
Other | 1.6 | 4.7 |
Subtotal | 14.8% | 20.8% |
North America | ||
United States | 3.2% | 0.0% |
Canada | 2.1 | 6.2 |
Subtotal | 5.3% | 6.2% |
Middle East | ||
Other | 0.0% | 0.3% |
11
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.
Fiscal-Year Total Returns (%): October 31, 2007, Through April 30, 2018
For a benchmark description, see the Glossary.
Note: For 2018, performance data reflect the six months ended April 30, 2018.
Average Annual Total Returns: Periods Ended March 31, 2018
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 | 17.67% | 6.76% | 2.86% |
See Financial Highlights for dividend and capital gains information.
12
International Value Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2018
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks (94.8%)1 | |||
Australia (1.2%) | |||
BHP Billiton Ltd. | 3,342,528 | 77,979 | |
QBE Insurance Group | |||
Ltd. | 6,133,207 | 45,806 | |
123,785 | |||
Belgium (0.6%) | |||
^ | Anheuser-Busch | ||
InBev SA/NV | 622,077 | 61,794 | |
Brazil (1.6%) | |||
* | Petroleo Brasileiro | ||
SA ADR | 3,731,900 | 52,582 | |
Cielo SA | 7,458,120 | 40,876 | |
BB Seguridade | |||
Participacoes SA | 5,173,800 | 40,585 | |
Cia de Saneamento | |||
Basico do Estado de | |||
Sao Paulo | 2,978,500 | 29,894 | |
* | Petroleo Brasileiro SA | ||
ADR Preference Shares | 163,340 | 2,148 | |
166,085 | |||
Canada (2.0%) | |||
Canadian Natural | |||
Resources Ltd. | 2,054,300 | 74,111 | |
Suncor Energy Inc. | 1,720,200 | 65,783 | |
Canadian National | |||
Railway Co. | 505,400 | 39,036 | |
National Bank of | |||
Canada | 659,800 | 31,337 | |
210,267 | |||
China (4.8%) | |||
* | Baidu Inc. ADR | 502,500 | 126,077 |
Tencent Holdings Ltd. | 2,234,700 | 109,864 | |
Shanghai Fosun | |||
Pharmaceutical | |||
Group Co. Ltd. | 14,844,000 | 80,519 | |
Lenovo Group Ltd. | 123,668,000 | 58,715 | |
* | 58.com Inc. ADR | 531,915 | 46,484 |
China Mobile Ltd. | 4,180,500 | 39,826 | |
Ping An Insurance | |||
Group Co. of China Ltd. | 3,950,000 | 38,597 | |
500,082 | |||
Denmark (0.9%) | |||
Carlsberg A/S Class B | 590,071 | 65,989 | |
* | Genmab A/S | 123,000 | 24,833 |
90,822 | |||
Finland (1.5%) | |||
Sampo Oyj Class A | 1,518,490 | 82,123 | |
Nokia Oyj | 13,201,731 | 79,214 | |
161,337 | |||
France (6.7%) | |||
TOTAL SA | 2,718,724 | 170,878 | |
^ | Sanofi | 1,812,753 | 143,322 |
^ | Vinci SA | 797,532 | 79,741 |
Valeo SA | 1,047,656 | 70,046 | |
Safran SA | 544,062 | 63,814 | |
Cie Generale des | |||
Etablissements | |||
Michelin SCA | 398,613 | 56,055 | |
* | Ubisoft Entertainment | ||
SA | 489,800 | 46,800 | |
* | ArcelorMittal | 1,343,988 | 45,553 |
BNP Paribas SA | 290,660 | 22,439 | |
698,648 | |||
Germany (4.7%) | |||
SAP SE | 973,620 | 108,176 | |
* | Commerzbank AG | 7,083,969 | 91,268 |
Bayer AG | 749,545 | 89,586 | |
E.ON SE | 7,248,202 | 79,367 | |
Fresenius SE & Co. KGaA | 503,824 | 38,369 | |
Continental AG | 116,908 | 31,137 | |
Deutsche Post AG | 716,175 | 31,086 | |
Muenchener | |||
Rueckversicherungs- | |||
Gesellschaft AG in | |||
Muenchen | 109,170 | 24,985 | |
493,974 |
13
International Value Fund
Market | ||||
Value• | ||||
Shares | ($000) | |||
Hong Kong (2.3%) | ||||
Galaxy Entertainment | ||||
Group Ltd. | 10,278,000 | 89,959 | ||
CK Hutchison Holdings | ||||
Ltd. | 5,495,692 | 64,986 | ||
Swire Pacific Ltd. | ||||
Class A | 6,451,850 | 63,753 | ||
Li & Fung Ltd. | 38,162,000 | 19,193 | ||
237,891 | ||||
India (1.8%) | ||||
ICICI Bank Ltd. ADR | 15,613,285 | 132,869 | ||
^ | Infosys Ltd. ADR | 3,037,600 | 53,674 | |
186,543 | ||||
Indonesia (1.0%) | ||||
Bank Negara Indonesia | ||||
Persero Tbk PT | 119,284,300 | 68,674 | ||
Telekomunikasi | ||||
Indonesia Persero | ||||
Tbk PT ADR | 1,208,068 | 32,920 | ||
101,594 | ||||
Ireland (0.5%) | ||||
* | Ryanair Holdings plc ADR | 463,454 | 50,966 | |
Italy (1.2%) | ||||
Eni SPA | 5,275,379 | 103,127 | ||
UniCredit SPA | 1,135,386 | 24,615 | ||
127,742 | ||||
Japan (18.9%) | ||||
Sumitomo Mitsui | ||||
Financial Group Inc. | 3,772,500 | 157,231 | ||
Panasonic Corp. | 8,435,300 | 124,903 | ||
Omron Corp. | 1,990,800 | 107,442 | ||
Sony Corp. | 2,259,100 | 105,514 | ||
Mitsubishi Corp. | 3,537,200 | 97,540 | ||
Daiwa House Industry | ||||
Co. Ltd. | 2,559,000 | 93,560 | ||
East Japan Railway Co. | 941,200 | 90,419 | ||
Sumitomo Mitsui Trust | ||||
Holdings Inc. | 2,118,800 | 89,852 | ||
Ryohin Keikaku Co. Ltd. | 258,600 | 88,458 | ||
Makita Corp. | 1,744,700 | 78,171 | ||
Nomura Holdings Inc. | 12,169,400 | 70,091 | ||
Sumitomo Electric | ||||
Industries Ltd. | 4,439,000 | 67,957 | ||
Takashimaya Co. Ltd. | 7,429,000 | 63,796 | ||
Nidec Corp. | 398,700 | 62,374 | ||
Japan Tobacco Inc. | 2,295,300 | 61,701 | ||
Sumitomo Realty & | ||||
Development Co. Ltd. | 1,417,877 | 56,323 | ||
Alps Electric Co. Ltd. | 2,489,500 | 54,984 | ||
^ | Yahoo Japan Corp. | 13,049,500 | 53,629 | |
DeNA Co. Ltd. | 2,726,500 | 51,966 | ||
Fujitsu Ltd. | 8,137,000 | 49,330 |
KDDI Corp. | 1,453,800 | 39,025 | |
Tokyo Electron Ltd. | 200,800 | 38,564 | |
Kao Corp. | 507,500 | 36,482 | |
Japan Post Holdings | |||
Co. Ltd. | 2,684,800 | 32,624 | |
Honda Motor Co. Ltd. | 827,700 | 28,461 | |
Hitachi Ltd. | 3,387,000 | 24,720 | |
Hino Motors Ltd. | 1,950,100 | 23,792 | |
Astellas Pharma Inc. | 1,625,500 | 23,775 | |
Teijin Ltd. | 1,227,300 | 23,074 | |
Toyota Motor Corp. | 345,709 | 22,669 | |
Daiwa Securities Group | |||
Inc. | 3,414,000 | 20,943 | |
Yamato Kogyo Co. Ltd. | 701,000 | 20,665 | |
Dentsu Inc. | 407,600 | 19,309 | |
1,979,344 | |||
Netherlands (2.6%) | |||
Wolters Kluwer NV | 1,593,257 | 86,212 | |
Koninklijke Ahold | |||
Delhaize NV | 3,150,988 | 76,017 | |
ING Groep NV | 4,175,981 | 70,368 | |
2 | ABN AMRO Group NV | 1,284,109 | 39,822 |
272,419 | |||
Norway (1.7%) | |||
^ | DNB ASA | 3,735,270 | 69,854 |
Statoil ASA | 2,068,323 | 52,893 | |
Telenor ASA | 2,389,180 | 52,882 | |
175,629 | |||
Other (0.4%) | |||
3 | Vanguard FTSE | ||
All-World ex-US ETF | 718,406 | 39,282 | |
Philippines (0.1%) | |||
* | Alliance Global Group | ||
Inc. | 36,656,000 | 9,233 | |
Russia (1.0%) | |||
Gazprom PJSC ADR | 9,420,057 | 43,469 | |
* | Yandex NV Class A | 1,028,315 | 34,305 |
Lukoil PJSC ADR | 385,850 | 25,719 | |
Gazprom PJSC ADR | 740,167 | 3,375 | |
106,868 | |||
Singapore (2.7%) | |||
DBS Group Holdings Ltd. | 8,413,100 | 194,108 | |
Singapore | |||
Telecommunications | |||
Ltd. | 35,267,900 | 93,287 | |
287,395 | |||
South Africa (0.8%) | |||
Sanlam Ltd. | 8,105,021 | 51,199 | |
Mr Price Group Ltd. | 1,473,618 | 32,337 | |
83,536 |
14
International Value Fund
Market | ||
Value• | ||
Shares | ($000) | |
South Korea (2.7%) | ||
Samsung Electronics | ||
Co. Ltd. | 2,933,850 | 145,437 |
E-MART Inc. | 178,078 | 44,828 |
Hana Financial Group Inc. | 984,207 | 43,732 |
Shinhan Financial Group | ||
Co. Ltd. | 561,096 | 24,984 |
Kia Motors Corp. | 675,146 | 20,845 |
279,826 | ||
Spain (3.3%) | ||
Telefonica SA | 8,601,559 | 87,655 |
^ Banco Santander SA | 10,909,809 | 70,488 |
Banco Bilbao Vizcaya | ||
Argentaria SA | 7,576,533 | 61,311 |
Banco de Sabadell SA | 28,956,274 | 56,665 |
Red Electrica Corp. SA | 2,399,160 | 49,976 |
Mapfre SA | 7,131,176 | 24,738 |
350,833 | ||
Sweden (1.1%) | ||
Assa Abloy AB Class B | 3,991,085 | 83,641 |
Nordea Bank AB | 3,009,045 | 30,604 |
114,245 | ||
Switzerland (5.6%) | ||
Novartis AG | 2,430,221 | 187,064 |
Roche Holding AG | 627,546 | 139,433 |
Adecco Group AG | 1,221,508 | 80,895 |
LafargeHolcim Ltd. | 969,556 | 53,860 |
Credit Suisse Group AG | 2,906,412 | 49,020 |
ABB Ltd. | 1,691,906 | 39,448 |
Cie Financiere | ||
Richemont SA | 351,201 | 33,385 |
583,105 | ||
Taiwan (1.5%) | ||
Taiwan Semiconductor | ||
Manufacturing Co. Ltd. | 11,769,704 | 89,654 |
Silicon Motion | ||
Technology Corp. ADR | 1,412,526 | 63,860 |
153,514 | ||
Thailand (1.0%) | ||
Bangkok Bank PCL | 13,166,800 | 80,168 |
Kasikornbank PCL | ||
(Foreign) | 4,418,600 | 28,014 |
108,182 | ||
Turkey (0.6%) | ||
Turkcell Iletisim | ||
Hizmetleri AS | 14,757,117 | 50,812 |
KOC Holding AS | 5,444,720 | 18,394 |
69,206 |
United Kingdom (16.9%) | ||
Royal Dutch Shell plc | ||
Class A | 4,541,242 | 158,917 |
Prudential plc | 4,857,126 | 124,897 |
AstraZeneca plc | 1,635,922 | 114,519 |
Tesco plc | 34,454,090 | 111,595 |
BP plc | 14,362,003 | 106,681 |
BP plc ADR | 2,362,200 | 105,330 |
Barclays plc | 35,104,763 | 100,088 |
Unilever plc | 1,601,390 | 89,826 |
Shire plc | 1,546,787 | 82,367 |
British American | ||
Tobacco plc | 1,483,203 | 81,351 |
Compass Group plc | 3,558,049 | 76,331 |
WPP plc | 4,000,681 | 68,653 |
Kingfisher plc | 15,385,104 | 64,163 |
Ferguson plc | 788,316 | 60,344 |
HSBC Holdings plc | 5,877,471 | 58,516 |
ITV plc | 28,019,734 | 58,292 |
Whitbread plc | 926,618 | 54,520 |
* Royal Bank of Scotland | ||
Group plc | 14,611,000 | 54,108 |
Ashtead Group plc | 1,677,633 | 46,593 |
Lloyds Banking Group | ||
plc | 41,473,540 | 36,785 |
RELX plc | 1,558,700 | 33,314 |
Royal Dutch Shell plc | ||
Class A | 827,596 | 28,793 |
Johnson Matthey plc | 571,511 | 25,829 |
Babcock International | ||
Group plc | 2,143,115 | 21,632 |
1,763,444 | ||
United States (3.1%) | ||
Accenture plc Class A | 618,190 | 93,470 |
Aon plc | 498,855 | 71,072 |
Medtronic plc | 1,043,785 | 83,639 |
RenaissanceRe | ||
Holdings Ltd. | 333,875 | 45,420 |
Signet Jewelers Ltd. | 687,174 | 26,717 |
320,318 | ||
Total Common Stocks | ||
(Cost $8,778,241) | 9,907,909 |
15
International Value Fund
Market | ||||
Value• | ||||
Shares | ($000) | |||
Temporary Cash Investments (9.1%)1 | ||||
Money Market Fund (8.9%) | ||||
4,5 | Vanguard Market | |||
Liquidity Fund, | ||||
1.886% | 9,338,251 | 933,825 | ||
Face | ||||
Amount | ||||
($000) | ||||
U. S. Government and Agency Obligations (0.2%) | ||||
United States Treasury Bill, | ||||
1.391%%–1.461%, 5/3/18 | 7,100 | 7,099 | ||
6 | United States Treasury Bill, | |||
1.370%, 5/17/18 | 4,000 | 3,997 | ||
6 | United States Treasury Bill, | |||
1.510%, 6/21/18 | 5,000 | 4,988 | ||
6 | United States Treasury Bill, | |||
1.892%–1.941%, 9/27/18 | 5,700 | 5,655 | ||
6 | United States Treasury Bill, | |||
1.887%, 10/4/18 | 1,800 | 1,785 | ||
23,524 | ||||
Total Temporary Cash Investments | ||||
(Cost $957,284) | 957,349 | |||
Total Investments (103.9%) | ||||
(Cost $9,735,525) | 10,865,258 | |||
Other Assets and Liabilities (-3.9%) | ||||
Other Assets7 | 109,112 | |||
Liabilities 5 | (520,233) | |||
(411,121) | ||||
Net Assets (100%) | ||||
Applicable to 262,179,914 outstanding | ||||
$.001 par value shares of beneficial | ||||
interest (unlimited authorization) | 10,454,137 | |||
Net Asset Value Per Share | $39.87 |
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 9,892,151 |
Affiliated Issuers | 973,107 |
Total Investments in Securities | 10,865,258 |
Investment in Vanguard | 564 |
Receivables for Investment | |
Securities Sold | 9,687 |
Receivables for Accrued Income | 56,809 |
Receivables for Capital Shares Issued | 4,753 |
Variation Margin Receivable— | |
Futures Contracts | 614 |
Unrealized Appreciation— | |
Forward Currency Contracts | 38 |
Other Assets7 | 36,647 |
Total Assets | 10,974,370 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 94,961 |
Collateral for Securities on Loan | 393,147 |
Payables to Investment Advisor | 4,168 |
Payables for Capital Shares Redeemed | 5,825 |
Payables to Vanguard | 15,619 |
Variation Margin Payable— | |
Futures Contracts | 10 |
Unrealized Depreciation— | |
Forward Currency Contracts | 6,503 |
Total Liabilities | 520,233 |
Net Assets | 10,454,137 |
16
International Value Fund
At April 30, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 8,971,714 |
Undistributed Net Investment Income | 77,040 |
Accumulated Net Realized Gains | 275,217 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 1,129,733 |
Futures Contracts | 8,350 |
Forward Currency Contracts | (6,465) |
Foreign Currencies | (1,452) |
Net Assets | 10,454,137 |
• See Note A in Notes to Financial Statements.
^ Includes partial security positions on loan to broker-dealers.
The total value of securities on loan is $368,937,000.
* Non-income-producing security.
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 96.8% and 7.1%, 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, 2018, the value of this
security represented 0.4% 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 $393,147,000 of collateral received for securities
on loan.
6 Securities with a value of $11,189,000 have been segregated
as initial margin for open futures contracts.
7 Cash of $4,460,000 has been segregated as collateral for
open forward currency contracts.
ADR—American Depositary Receipt.
17
International Value Fund
Derivative Financial Instruments Outstanding as of Period End | ||||
Futures Contracts | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Long Futures Contracts | ||||
Dow Jones EURO STOXX 50 Index | June 2018 | 1,974 | 82,855 | 3,219 |
Topix Index | June 2018 | 379 | 61,634 | 3,253 |
S&P ASX 200 Index | June 2018 | 358 | 40,306 | 268 |
FTSE 100 Index | June 2018 | 336 | 34,524 | 1,610 |
8,350 |
Unrealized appreciation (depreciation) on open futures contracts, except for Topix Index and S&P ASX 200 Index contracts, is required to be treated as realized gain (loss) for tax purposes. Unrealized appreciation (depreciation) for Topix Index and S&P ASX 200 Index futures contracts is generally treated the same for financial reporting and tax purposes.
Forward Currency Contracts | ||||||
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
UBS AG | 6/20/18 | EUR | 50,857 | USD | 63,308 | (1,647) |
Goldman Sachs International | 6/12/18 | JPY | 5,330,706 | USD | 50,676 | (1,765) |
Toronto Dominion Securities | 6/26/18 | AUD | 35,823 | USD | 28,250 | (1,275) |
Barclays Bank plc | 6/20/18 | GBP | 17,110 | USD | 23,954 | (339) |
JPMorgan Chase Bank N.A. | 6/20/18 | EUR | 12,796 | USD | 15,915 | (401) |
JPMorgan Chase Bank N.A. | 6/26/18 | AUD | 13,086 | USD | 10,153 | (299) |
Citibank, N.A. | 6/12/18 | JPY | 697,825 | USD | 6,624 | (222) |
Citibank, N.A. | 6/20/18 | EUR | 3,652 | USD | 4,506 | (79) |
Morgan Stanley Capital Services Inc. | 6/20/18 | GBP | 3,141 | USD | 4,476 | (140) |
Bank of America, N.A. | 6/20/18 | GBP | 2,676 | USD | 3,809 | (115) |
BNP Paribas | 6/12/18 | JPY | 363,090 | USD | 3,435 | (104) |
18
International Value Fund
Forward Currency Contracts (continued) | ||||||
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
Citibank, N.A. | 6/26/18 | AUD | 2,396 | USD | 1,823 | (39) |
Barclays Bank plc | 6/26/18 | AUD | 1,794 | USD | 1,414 | (64) |
Credit Suisse International | 6/20/18 | GBP | 926 | USD | 1,292 | (14) |
Citibank, N.A. | 6/20/18 | USD | 1,588 | EUR | 1,278 | 38 |
(6,465) | ||||||
AUD—Australian dollar. | ||||||
EUR—Euro. | ||||||
GBP—British pound. | ||||||
JPY—Japanese yen. | ||||||
USD—U.S. dollar. |
Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain
(loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
19
International Value Fund
Statement of Operations
Six Months Ended | |
April 30, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends—Unaffiliated Issuers1 | 123,502 |
Dividends—Affiliated Issuers | 445 |
Interest—Unaffiliated Issuers | 106 |
Interest—Affiliated Issuers | 2,888 |
Securities Lending—Net | 1,493 |
Total Income | 128,434 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 8,525 |
Performance Adjustment | (164) |
The Vanguard Group—Note C | |
Management and Administrative | 10,320 |
Marketing and Distribution | 781 |
Custodian Fees | 701 |
Shareholders’ Reports and Proxy | 58 |
Trustees’ Fees and Expenses | 9 |
Total Expenses | 20,230 |
Net Investment Income | 108,204 |
Realized Net Gain (Loss) | |
Investment Securities Sold—Unaffiliated Issuers | 273,807 |
Investment Securities Sold—Affiliated Issuers | (143) |
Futures Contracts | (4,509) |
Forward Currency Contracts | 4,462 |
Foreign Currencies | 364 |
Realized Net Gain (Loss) | 273,981 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Unaffiliated Issuers | (38,810) |
Investment Securities—Affiliated Issuers | 781 |
Futures Contracts | 3,735 |
Forward Currency Contracts | (2,994) |
Foreign Currencies | 170 |
Change in Unrealized Appreciation (Depreciation) | (37,118) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 345,067 |
1 Dividends are net of foreign withholding taxes of $14,883,000. |
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, | |
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 108,204 | 195,603 |
Realized Net Gain (Loss) | 273,981 | 260,429 |
Change in Unrealized Appreciation (Depreciation) | (37,118) | 1,473,826 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 345,067 | 1,929,858 |
Distributions | ||
Net Investment Income | (189,521) | (177,654) |
Realized Capital Gain | — | — |
Total Distributions | (189,521) | (177,654) |
Capital Share Transactions | ||
Issued | 790,064 | 1,229,424 |
Issued in Lieu of Cash Distributions | 175,732 | 167,198 |
Redeemed | (631,514) | (1,057,330) |
Net Increase (Decrease) from Capital Share Transactions | 334,282 | 339,292 |
Total Increase (Decrease) | 489,828 | 2,091,496 |
Net Assets | ||
Beginning of Period | 9,964,309 | 7,872,813 |
End of Period1 | 10,454,137 | 9,964,309 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $77,040,000 and $157,993,000. |
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 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $39.26 | $32.30 | $33.22 | $36.87 | $37.12 | $29.78 |
Investment Operations | ||||||
Net Investment Income | . 4181 | .7811 | .721 | .669 | .9772 | .757 |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments | .935 | 6.905 | (.979) | (3.373) | (.530) | 7.402 |
Total from Investment Operations | 1.353 | 7.686 | (.258) | (2.704) | .447 | 8.159 |
Distributions | ||||||
Dividends from Net Investment Income | (.743) | (.726) | (. 662) | (. 946) | (. 697) | (. 819) |
Distributions from Realized Capital Gains | — | — | — | — | — | — |
Total Distributions | (.743) | (.726) | (. 662) | (. 946) | (. 697) | (. 819) |
Net Asset Value, End of Period | $39.87 | $39.26 | $32.30 | $33.22 | $36.87 | $37.12 |
Total Return3 | 3.46% | 24.33% | -0.67% | -7.43% | 1.20% | 27.94% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $10,454 | $9,964 | $7,873 | $7,932 | $8,271 | $8,028 |
Ratio of Total Expenses to | ||||||
Average Net Assets4 | 0.39% | 0.40% | 0.43% | 0.46% | 0.44% | 0.43% |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 2.10% | 2.21% | 2.29% | 1.95% | 2.64%2 | 2.24% |
Portfolio Turnover Rate | 29% | 34% | 30% | 36% | 37% | 52% |
The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Calculated based on average shares outstanding.
2 Net investment income per share and the ratio of net investment income to average net assets include $.175 and 0.47%, respectively,
resulting from income received from Vodafone Group plc in the form of cash and shares in Verizon Communications Inc. in February 2014.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
4 Includes performance-based investment advisory fee increases (decreases) of 0.00%, 0.00%, 0.03%, 0.04%, 0.03%, and 0.01%.
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 are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. 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 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.
23
International Value Fund
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. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold, or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets 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 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 Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.
During the six months ended April 30, 2018, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. The fund’s average investment in forward currency contracts represented 2% of net assets, based on the average of the 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, 2014–2017), and for the period ended April 30, 2018, 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 before the opening of the market on the next business day. The fund further mitigates its
24
International Value Fund
counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
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, 2018, 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.
Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the fund’s understanding of the applicable countries’ tax rules and rates. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received during the year, if any, are included in dividend income. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
25
International Value Fund
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 Country World Index ex US 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 Country World Index ex US 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 Country World Index ex US for the preceding five years.
Vanguard manages the cash reserves of the fund as described below.
For the six months ended April 30, 2018, the aggregate investment advisory fee represented an effective annual basic rate of 0.17% of the fund’s average net assets, before a decrease of $164,000 (0.00%) 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 Assets and Liabilities. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2018, the fund had contributed to Vanguard capital in the amount of $564,000, representing 0.01% of the fund’s net assets and 0.23% 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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
26
International Value Fund
The following table summarizes the market value of the fund’s investments as of April 30, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 1,385,812 | 8,522,097 | — |
Temporary Cash Investments | 933,825 | 23,524 | — |
Futures Contracts—Assets1 | 614 | — | — |
Futures Contracts—Liabilities1 | (10) | — | — |
Forward Currency Contracts—Assets | — | 38 | — |
Forward Currency Contracts—Liabilities | — | (6,503) | — |
Total | 2,320,241 | 8,539,156 | — |
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 $119,525,000 based on Level 2 inputs were transferred from Level 1 during the fiscal period. Additionally, based on values on the date of transfer, securities valued at $137,837,000 based on Level 1 inputs were transferred from Level 2 during the fiscal period.
E. At April 30, 2018, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Statement of Assets and Liabilities Caption | ($000) | ($000) | ($000) |
Other Assets | 614 | 38 | 652 |
Other Liabilities | (10) | (6,503) | (6,513) |
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended April 30, 2018, were:
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) |
Futures Contracts | (4,509) | — | (4,509) |
Forward Currency Contracts | — | 4,462 | 4,462 |
Realized Net Gain (Loss) on Derivatives | (4,509) | 4,462 | (47) |
Change in Unrealized Appreciation (Depreciation) on Derivatives | |||
Futures Contracts | 3,735 | — | 3,735 |
Forward Currency Contracts | — | (2,994) | (2,994) |
Change in Unrealized Appreciation (Depreciation) on Derivatives | 3,735 | (2,994) | 741 |
27
International Value Fund
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.
At April 30, 2018, the cost of investment securities for tax purposes was $9,735,525,000. Net unrealized appreciation of investment securities for tax purposes was $1,129,733,000, consisting of unrealized gains of $1,660,266,000 on securities that had risen in value since their purchase and $530,533,000 in unrealized losses on securities that had fallen in value since their purchase.
G. During the six months ended April 30, 2018, the fund purchased $1,519,028,000 of investment securities and sold $1,415,775,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were:
Six Months Ended | Year Ended | |
April 30, 2018 | October 31, 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 19,621 | 34,979 |
Issued in Lieu of Cash Distributions | 4,439 | 5,264 |
Redeemed | (15,678) | (30,193) |
Net Increase (Decrease) in Shares Outstanding | 8,382 | 10,050 |
I. Transactions during the period in investments where the issuer is another member of The Vanguard Group were as follows:
Current Period Transactions | ||||||||
Oct. 31, | Proceeds | Realized | April 30, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Vanguard Market | ||||||||
Liquidity Fund | 503,134 | NA1 | NA1 | (143) | 106 | 2,888 | — | 933,825 |
Vanguard FTSE | ||||||||
All-World ex-US ETF | 38,607 | — | — | — | 675 | 445 | — | 39,282 |
Total | 541,741 | — | — | (143) | 781 | 3,333 | — | 973,107 |
1 Not applicable—purchases and sales are for temporary cash investment purposes. |
J. Management has determined that no material events or transactions occurred subsequent to April 30, 2018, that would require recognition or disclosure in these financial statements.
28
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.
29
Six Months Ended April 30, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
International Value Fund | 10/31/2017 | 4/30/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $1,034.59 | $1.97 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.86 | 1.96 |
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 0.39%. 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 (181/365).
30
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.
In May 2018, Edinburgh Partners was acquired by Franklin Resources, Inc., operating as Franklin Templeton Investments (“Franklin Templeton”). This change constituted an “assignment” under the Investment Company Act of 1940, as amended, and triggered the automatic termination of Edinburgh Partners’ former advisory agreement with the fund. The board of trustees approved a new advisory agreement with Edinburgh Partners to allow for an uninterrupted advisory relationship between Edinburgh Partners and the fund. The new agreement is materially the same as the former agreement with Edinburgh Partners except for the date.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisory presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also 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 is driven by bottom-up fundamental research by a team of sector analysts and uses a dividend discount model to select stocks that trade at a discount to intrinsic value. ARGA has managed a portion of the fund since 2012.
31
Edinburgh Partners. Founded in 2003, Edinburgh Partners is an independent fund management company specializing in global investment management. Edinburgh Partners employs a concentrated, low-turnover, value-oriented investment approach that results in a portfolio of companies with good long-term growth prospects and below-market price/earnings ratios. In-depth fundamental research on companies and industries is central to Edinburgh Partners’ investment process. The team 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 managed a portion of the fund since 2008.
Lazard. Lazard, a subsidiary of Lazard Freres & Co. LLC, 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 macro-economic factors pose to investment theses and the full range of potential outcomes for each holding. An experienced team of global sector analysts supports the portfolio management team. Lazard has managed 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 compared with a relevant 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 the 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 fund’s advisory fee schedules 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.
32
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.
33
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.
34
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
35
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.
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 208 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustees1
F. William McNabb III
Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.
Independent Trustees
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
JoAnn Heffernan Heisen
Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).
Brian Dvorak
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Chris D. McIsaac | |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2018, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
CFA® is a registered trademark owned by CFA Institute. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q462 062018 |
Semiannual Report | April 30, 2018
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 Performance at a Glance. | 1 |
CEO’s Perspective. | 3 |
Results of Proxy Voting. | 5 |
Fund Profile. | 7 |
Performance Summary. | 8 |
Financial Statements. | 9 |
About Your Fund’s Expenses. | 17 |
Trustees Approve Advisory Arrangement. | 19 |
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the six months ended April 30, 2018, Vanguard Diversified Equity Fund returned 5.22%, outpacing the 3.85% return of its benchmark, the MSCI US Broad Market Index, and the average return of its multicapitalization core fund peers.
• As a “fund of funds,” Diversified Equity reflects the combined results of its eight underlying actively managed Vanguard funds. The selected funds provide broad exposure to all segments of the U.S. equity market. Together, the funds cover the style and capitalization spectrum, investing in growth and value stocks of small-, mid-, and large-cap companies.
• Value stocks trailed their growth counterparts for the period, while large- and small-cap stocks recorded generally similar returns.
• Results for the underlying funds ranged from about 2% for Vanguard Capital Value Fund to nearly 9% for Vanguard Explorer Fund. All eight funds surpassed their benchmarks.
Total Returns: Six Months Ended April 30, 2018 | |
Total | |
Returns | |
Vanguard Diversified Equity Fund | 5.22% |
MSCI US Broad Market Index | 3.85 |
Multi-Cap Core Funds Average | 3.27 |
Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Acquired Fund Fees | Peer Group | |
and Expenses | Average | |
Diversified Equity Fund | 0.36% | 1.11% |
The acquired fund fees and expenses—drawn from the prospectus dated February 22, 2018—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, 2018, the annualized acquired fund fees and expenses were 0.37%. The peer-group expense ratio is derived from data provided
by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.
Peer group: Multi-Cap Core Funds.
1
Underlying Funds: Allocations and Returns | ||
Six Months Ended April 30, 2018 | ||
Percentage of | ||
Diversified Equity Fund | ||
Vanguard Fund | Assets | Total Returns |
Vanguard Growth and Income Fund Investor | ||
Shares | 20.0% | 3.92% |
Vanguard Morgan™ Growth Fund Investor | ||
Shares | 15.0 | 6.26 |
Vanguard U.S. Growth Fund Investor Shares | 15.0 | 7.68 |
Vanguard Windsor™ Fund Investor Shares | 15.0 | 3.66 |
Vanguard Windsor II Fund Investor Shares | 15.0 | 2.64 |
Vanguard Explorer™ Fund Investor Shares | 10.0 | 8.79 |
Vanguard Mid-Cap Growth Fund | 5.0 | 7.58 |
Vanguard Capital Value Fund | 5.0 | 2.35 |
Combined | 100.0% | 5.22% |
2
CEO’s Perspective
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.
Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority
3
front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make
Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
May 16, 2018
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2018 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 3.83% | 13.17% | 12.84% |
Russell 2000 Index (Small-caps) | 3.27 | 11.54 | 11.74 |
Russell 3000 Index (Broad U.S. market) | 3.79 | 13.05 | 12.75 |
FTSE All-World ex US Index (International) | 3.72 | 15.84 | 5.85 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | -1.87% | -0.32% | 1.47% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.97 | 1.56 | 2.44 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.67 | 1.16 | 0.32 |
CPI | |||
Consumer Price Index | 1.57% | 2.46% | 1.50% |
4
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 254,575,796 | 8,033,187 | 96.9% |
Emerson U. Fullwood | 254,454,697 | 8,154,286 | 96.9% |
Amy Gutmann | 254,177,462 | 8,431,521 | 96.8% |
JoAnn Heffernan Heisen | 254,714,031 | 7,894,951 | 97.0% |
F. Joseph Loughrey | 254,633,918 | 7,975,065 | 97.0% |
Mark Loughridge | 254,534,475 | 8,074,507 | 96.9% |
Scott C. Malpass | 254,514,046 | 8,094,936 | 96.9% |
F. William McNabb III | 254,640,222 | 7,968,761 | 97.0% |
Deanna Mulligan | 254,832,344 | 7,776,639 | 97.0% |
André F. Perold | 253,863,549 | 8,745,433 | 96.7% |
Sarah Bloom Raskin | 254,398,748 | 8,210,235 | 96.9% |
Peter F. Volanakis | 254,609,402 | 7,999,581 | 97.0% |
* Results are for all funds within the same trust. |
Proposal 2—Approve a manager-of-managers arrangement with third-party investment advisors.
This arrangement enables the fund to enter into and materially amend investment advisory arrangements with third-party investment advisors, subject to the approval of the fund’s board of trustees and certain conditions imposed by the Securities and Exchange Commission, while avoiding the costs and delays associated with obtaining future shareholder approval.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Diversified Equity Fund | 31,274,494 | 1,685,879 | 1,410,291 | 2,751,155 | 84.2% |
5
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Diversified Equity Fund | 31,660,840 | 1,784,906 | 924,918 | 2,751,155 | 85.3% |
6
Diversified Equity Fund
Fund Profile
As of April 30, 2018
Portfolio Characteristics | ||
MSCI US | ||
Broad | ||
Market | ||
Fund | Index | |
Number of Stocks | 1,564 | 3,040 |
Median Market Cap | $46.4B | $65.9B |
Price/Earnings Ratio | 25.3x | 25.6x |
Price/Book Ratio | 3.0x | 3.0x |
Return on Equity | 15.0% | 15.0% |
Earnings Growth Rate | 10.9% | 8.3% |
Dividend Yield | 1.5% | 1.8% |
Turnover Rate (Annualized) | 9% | — |
Ticker Symbol | VDEQX | — |
Acquired Fund Fees | ||
and Expenses1 | 0.36% | — |
30-Day SEC Yield | 1.19% | — |
Allocation to Underlying Vanguard Funds | |
Vanguard Growth and Income Fund | |
Investor Shares | 20.0% |
Vanguard Morgan Growth Fund Investor | |
Shares | 15.0 |
Vanguard U.S. Growth Fund Investor | |
Shares | 15.0 |
Vanguard Windsor Fund Investor Shares | 15.0 |
Vanguard Windsor II Fund Investor | |
Shares | 15.0 |
Vanguard Explorer Fund Investor Shares | 10.0 |
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 | 1.03 |
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 | 11.8% | 13.2% |
Consumer Staples | 4.9 | 6.3 |
Energy | 5.0 | 6.0 |
Financials | 14.1 | 14.7 |
Health Care | 13.7 | 13.7 |
Industrials | 10.9 | 10.6 |
Information Technology | 29.9 | 23.9 |
Materials | 3.3 | 3.3 |
Real Estate | 2.8 | 3.7 |
Telecommunication Services | 1.2 | 1.7 |
Utilities | 1.4 | 2.9 |
Other | 1.0 | 0.0 |
Sector categories are based on the Global Industry
Classification Standard (“GICS”), except for the “Other”
category (if applicable), which includes securities that have not
been provided a GICS classification as of the effective reporting
period. Fund percentages reflect holdings of underlying funds.
1 This figure—drawn from the prospectus dated February 22, 2018—represents 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, 2018, the annualized
acquired fund fees and expenses were 0.37%.
7
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, 2007, Through April 30, 2018
Note: For 2018, performance data reflect the six months ended April 30, 2018.
Average Annual Total Returns: Periods Ended March 31, 2018
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 | 16.32% | 12.95% | 9.65% |
See Financial Highlights for dividend and capital gains information.
8
Diversified Equity Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2018
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | ||
Value• | ||
Shares | ($000) | |
Investment Companies (100.0%) | ||
U.S. Stock Funds (100.0%) | ||
Vanguard Growth and Income Fund Investor Shares | 6,593,984 | 310,643 |
Vanguard Morgan Growth Fund Investor Shares | 7,689,664 | 232,997 |
Vanguard U. S. Growth Fund Investor Shares | 6,084,266 | 232,480 |
Vanguard Windsor Fund Investor Shares | 9,928,097 | 232,317 |
Vanguard Windsor II Fund Investor Shares | 6,260,816 | 232,151 |
Vanguard Explorer Fund Investor Shares | 1,563,538 | 155,134 |
Vanguard Mid-Cap Growth Fund | 2,839,564 | 78,258 |
Vanguard Capital Value Fund | 5,935,894 | 77,345 |
Total Investment Companies (Cost $998,942) | 1,551,325 | |
Temporary Cash Investment (0.0%) | ||
Money Market Fund (0.0%) | ||
1 Vanguard Market Liquidity Fund, 1.886% (Cost $0) | 1 | — |
Total Investments (100.0%) (Cost $998,942) | 1,551,325 | |
Other Assets and Liabilities (0.0%) | ||
Other Assets | 843 | |
Liabilities | (795) | |
Total Assets and Liabilities | 48 | |
Net Assets (100%) | ||
Applicable to 43,792,256 outstanding $.001 par value shares of | ||
beneficial interest (unlimited authorization) | 1,551,373 | |
Net Asset Value Per Share | $35.43 |
9
Diversified Equity Fund
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value—Affiliated Funds | 1,551,325 |
Receivables for Investment Securities Sold | 312 |
Receivables for Capital Shares Issued | 531 |
Total Assets | 1,552,168 |
Liabilities | |
Payables for Capital Shares Redeemed | 319 |
Other Liabilities | 476 |
Total Liabilities | 795 |
Net Assets | 1,551,373 |
At April 30, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 932,555 |
Overdistributed Net Investment Income | (9) |
Accumulated Net Realized Gains | 66,444 |
Unrealized Appreciation (Depreciation) | 552,383 |
Net Assets | 1,551,373 |
• See Note A in Notes to Financial Statements.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown
is the 7-day yield.
See accompanying Notes, which are an integral part of the Financial Statements.
10
Diversified Equity Fund
Statement of Operations
Six Months Ended | |
April 30, 2018 | |
($000) | |
Investment Income | |
Income | |
Income Distributions Received from Affiliated Funds | 11,070 |
Net Investment Income—Note B | 11,070 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received from Affiliated Funds | 73,637 |
Affiliated Funds Sold | 4,974 |
Realized Net Gain (Loss) | 78,611 |
Change in Unrealized Appreciation (Depreciation) from Affiliated Funds | (13,638) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 76,043 |
See accompanying Notes, which are an integral part of the Financial Statements.
11
Diversified Equity Fund
Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 11,070 | 17,822 |
Realized Net Gain (Loss) | 78,611 | 63,264 |
Change in Unrealized Appreciation (Depreciation) | (13,638) | 215,205 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 76,043 | 296,291 |
Distributions | ||
Net Investment Income | (15,286) | (16,846) |
Realized Capital Gain1 | (69,091) | (77,095) |
Total Distributions | (84,377) | (93,941) |
Capital Share Transactions | ||
Issued | 188,709 | 107,815 |
Issued in Lieu of Cash Distributions | 80,017 | 89,282 |
Redeemed | (147,984) | (236,646) |
Net Increase (Decrease) from Capital Share Transactions | 120,742 | (39,549) |
Total Increase (Decrease) | 112,408 | 162,801 |
Net Assets | ||
Beginning of Period | 1,438,965 | 1,276,164 |
End of Period2 | 1,551,373 | 1,438,965 |
1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $13,729,000 and $1,082,000, 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 ($9,000) and $4,207,000.
See accompanying Notes, which are an integral part of the Financial Statements.
12
Diversified Equity Fund
Financial Highlights
Six Months | ||||||
Ended | ||||||
For a Share Outstanding | April 30, | Year Ended October 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $35.57 | $30.76 | $33.15 | $33.18 | $29.43 | $22.70 |
Investment Operations | ||||||
Net Investment Income | . 2581 | .4281 | .397 | .394 | .3221 | .332 |
Capital Gain Distributions Received | 1.7131 | 1.0641 | .860 | 2.606 | .8481 | .131 |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments | (.134) | 5.627 | (.836) | (1.453) | 3.243 | 6.626 |
Total from Investment Operations | 1.837 | 7.119 | .421 | 1.547 | 4.413 | 7.089 |
Distributions | ||||||
Dividends from Net Investment Income | (. 358) | (. 414) | (. 362) | (. 342) | (. 283) | (. 344) |
Distributions from Realized Capital Gains | (1.619) | (1.895) | (2.449) | (1.235) | (.380) | (.015) |
Total Distributions | (1.977) | (2.309) | (2.811) | (1.577) | (.663) | (.359) |
Net Asset Value, End of Period | $35.43 | $35.57 | $30.76 | $33.15 | $33.18 | $29.43 |
Total Return2 | 5.22% | 24.47% | 1.39% | 4.71% | 15.20% | 31.70% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $1,551 | $1,439 | $1,276 | $1,456 | $1,513 | $1,420 |
Ratio of Total Expenses to | ||||||
Average Net Assets | — | — | — | — | — | — |
Acquired Fund Fees and Expenses | 0.37% | 0.36% | 0.36% | 0.40% | 0.41% | 0.40% |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 1.44% | 1.31% | 1.26% | 1.16% | 1.03% | 1.27% |
Portfolio Turnover Rate | 9% | 5% | 9% | 10% | 5% | 5% |
The expense ratio, acquired fund fees and expenses, net investment 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.
13
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, 2014–2017), and for the period ended April 30, 2018, 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, 2018, 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, 2018, 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.
14
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). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
At April 30, 2018, 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, 2018, the cost of investment securities for tax purposes was $998,942,000. Net unrealized appreciation of investment securities for tax purposes was $552,383,000, 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, 2018 | October 31, 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 5,172 | 3,295 |
Issued in Lieu of Cash Distributions | 2,279 | 2,953 |
Redeemed | (4,111) | (7,286) |
Net Increase (Decrease) in Shares Outstanding | 3,340 | (1,038) |
15
Diversified Equity Fund
F. Transactions during the period in affiliated underlying Vanguard funds were as follows:
Current Period Transactions | ||||||||
Oct. 31, | Proceeds | Realized | April 30, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Vanguard Market | ||||||||
Liquidity Fund | — | NA1 | NA1 | — | — | — | — | — |
Vanguard Capital | ||||||||
Value Fund | 70,852 | 6,640 | 300 | 1 | 152 | 1,429 | — | 77,345 |
Vanguard Explorer | ||||||||
Fund | 144,428 | 24,555 | 10,720 | 540 | (3,669) | 669 | 15,359 | 155,134 |
Vanguard Growth | ||||||||
and Income Fund | 287,833 | 32,854 | 7,064 | 842 | (3,822) | 2,109 | 12,102 | 310,643 |
Vanguard Mid-Cap | ||||||||
Growth Fund | 72,557 | 7,004 | 4,460 | 256 | 2,901 | 257 | 2,246 | 78,258 |
Vanguard Morgan | ||||||||
Growth Fund | 217,059 | 32,692 | 14,080 | 934 | (3,608) | 1,845 | 14,992 | 232,997 |
Vanguard U.S. | ||||||||
Growth Fund | 217,205 | 27,071 | 18,469 | 2,250 | 4,423 | 836 | 9,718 | 232,480 |
Vanguard Windsor | ||||||||
Fund | 214,573 | 22,021 | 4,379 | (36) | 138 | 1,759 | 5,931 | 232,317 |
Vanguard Windsor II | ||||||||
Fund | 214,804 | 34,342 | 7,029 | 187 | (10,153) | 2,166 | 13,289 | 232,151 |
Total | 1,439,311 | 187,179 | 66,501 | 4,974 | (13,638) | 11,070 | 73,637 | 1,551,325 |
1 Not applicable—purchases and sales are for temporary cash investment purposes. |
G. Management has determined that no material events or transactions occurred subsequent to April 30, 2018, that would require recognition or disclosure in these financial statements.
16
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.
17
Six Months Ended April 30, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Diversified Equity Fund | 10/31/2017 | 4/30/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $1,052.16 | $1.88 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.96 | 1.86 |
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 0.37%. 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 (181/365).
18
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. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also 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 compared with a relevant 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.
19
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.
20
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.
22
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
23
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.
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 208 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustees1
F. William McNabb III
Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.
Independent Trustees
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because
they are officers of the Vanguard funds.
JoAnn Heffernan Heisen
Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).
Brian Dvorak
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Chris D. McIsaac | |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2018, Bloomberg. All |
rights reserved. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q6082 062018 |
Semiannual Report | April 30, 2018
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 Performance at a Glance. | 1 |
CEO’s Perspective. | 2 |
Advisors’ Report. | 4 |
Results of Proxy Voting. | 9 |
Fund Profile. | 10 |
Performance Summary. | 12 |
Financial Statements. | 13 |
About Your Fund’s Expenses. | 29 |
Trustees Approve Advisory Arrangements. | 31 |
Glossary. | 33 |
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• For the six months ended April 30, 2018, Vanguard Emerging Markets Select Stock Fund returned 3.38%. That performance trailed the 4.87% return of the benchmark, the FTSE Emerging Index, and the 3.83% average return of peer funds.
• The fund’s objective is to seek long-term capital appreciation through broadly diversified exposure to emerging markets.
• Among countries represented in the fund, South Africa and Russia produced some of the strongest returns on a relative basis.
• Stock selection was positive in seven of the fund’s 11 industry sectors.
Energy, consumer discretionary, and health care stocks drove the fund’s relative performance for the period; financials, information technology, consumer staples, and telecommunication services were weak spots.
Total Returns: Six Months Ended April 30, 2018 | |
Total | |
Returns | |
Vanguard Emerging Markets Select Stock Fund | 3.38% |
FTSE Emerging Index | 4.87 |
Emerging Markets Funds Average | 3.83 |
Emerging Markets Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Emerging Markets Select Stock Fund | 0.92% | 1.44% |
The fund expense ratio shown is from the prospectus dated February 22, 2018, and represents estimated costs for the current fiscal year.
For the six months ended April 30, 2018, the fund’s annualized expense ratio was 0.97%. The peer-group expense ratio is derived from
data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2017.
Peer group: Emerging Markets Funds.
1
CEO’s Perspective
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.
Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority
2
front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make
Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
May 16, 2018
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2018 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 3.83% | 13.17% | 12.84% |
Russell 2000 Index (Small-caps) | 3.27 | 11.54 | 11.74 |
Russell 3000 Index (Broad U.S. market) | 3.79 | 13.05 | 12.75 |
FTSE All-World ex US Index (International) | 3.72 | 15.84 | 5.85 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | -1.87% | -0.32% | 1.47% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.97 | 1.56 | 2.44 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.67 | 1.16 | 0.32 |
CPI | |||
Consumer Price Index | 1.57% | 2.46% | 1.50% |
3
Advisors’ Report
For the six months ended April 30, 2018, Vanguard Emerging Markets Select Stock Fund returned 3.38%. Your fund is managed by four independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct yet complementary investment approaches. It’s 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 portfolio positioning reflects this assessment.
These comments were prepared on May 17, 2018.
Vanguard Emerging Markets Select Stock Fund Investment Advisors | |||
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Wellington Management | 25 | 189 | Allocates the assets in its portion of the fund to |
Company LLP | a team 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. | |||
Pzena Investment Management, | 25 | 184 | Uses a deep-value approach that focuses on |
LLC | the most 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. | |||
Oaktree Capital Management, | 25 | 182 | Seeks securities that have been undervalued by |
L.P. | 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. | |||
M&G Investment Management | 22 | 162 | Seeks to identify companies that can handle |
Limited | capital 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. | |||
Cash Investments | 3 | 25 | 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. |
4
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 taking a bottom-up fundamental approach grounded in industry specialization to help us select companies that can outperform their peers.
During the six months, emerging-market equities were up in U.S. dollar terms as measured by the FTSE Emerging Index. Energy, financial, and materials stocks led index returns; consumer discretionary was the only sector with negative absolute performance. In terms of regions, Association of Southeast Asian Nations stocks led the rally, while India lagged.
Our performance was hurt by security selection in materials, industrials, and financials. Bhartis Infratel, a leading Indian telecommunications tower infrastructure provider, and Rusal, a Russian aluminum manufacturer, were among our portfolio’s top detractors. Shares of Bhartis Infratel fell as the rapid consolidation of Indian
operators and tower companies has pushed smaller players out of the market and caused tenancies to decline. However, we continue to hold this company in our portfolio. Because of this consolidation and the regional dominance of the more established tower companies across India, we believe competition will be limited and will lead to improved pricing in the industry.
Rusal was hit especially hard by U.S. sanctions, and we have exited our position.
GlobalWafers, a Taiwanese semiconductor and wafer developer, and China Longyuan Power Group, a wind power producer, were among our top relative contributors. GlobalWafers’ stock rose on expectations that silicon wafer price hikes would continue. In addition, there is optimism about potential synergies from the recent acquisition of SunEdison Semiconductor, as GlobalWafers has made several acquisitions in recent years that added value.
China Longyuan’s stock price rose following positive results that highlighted strong wind power utilization rates. Recent technological improvements and falling equipment costs are supporting the long-term profitability of wind power production. We believe wind power should be structurally well-positioned as a source of renewable energy in China and could benefit from regulatory support.
5
Pzena Investment Management, LLC
Portfolio Managers:
Caroline Cai, CFA, Principal
Allison Fisch, Principal
John P. Goetz, Managing Principal and
Co-Chief Investment Officer
Over the last six months, our portfolio benefited from positions in energy, materials, and health care stocks. Our performance in these sectors was offset by positions in information technology, consumer discretionary, and consumer staples companies. South African, Russian, and Brazilian holdings were our large contributors, while Taiwanese, Indian, and Turkish stocks detracted.
The largest individual contributor was pharmaceutical manufacturer China Shineway, which was aided by stronger sales volume and profit improvement through several initiatives. Russian oil company Lukoil strengthened on higher oil prices and its announcement of a share buyback program. Also contributing notably was South African industrial company Reunert, on strong margins across segments.
The largest individual detractor, Hon Hai Precision Industry, a Taiwanese electronics manufacturer, traded down after reporting lower-than-expected margins, likely attributable to higher
expenses related to the iPhone X. Hyundai Heavy Industries, a South Korean shipbuilder, also detracted after announcing a dilutive capital raise at a 25% discount at the end of 2017, driving down the stock. Those concerns have abated, however, and the stock has since recouped most of its losses. Turkish bank Akbank, another detractor, reported strong earnings and growth; however, it is highly sensitive to the country’s macroeconomic environment, and shares were hurt by rising concerns about the economy and weakening currency.
We added Huadian Power International, one of the largest Chinese coal utilities, to the portfolio. Its profitability has been hurt by rising coal prices, but we believe it should improve through a combination of regulatory price increases and coal price normalization. We also added to China Resources Power, which underperformed because of a coal price increase.
We added to our positions in Czech utility CEZ, South Korea’s Shinhan Financial Group, and Wilmar International, an agribusiness company based in Singapore. These additions were funded by selling LG Electronics as it approached our estimate of fair value and trimming our position in Randon, a Brazilian trailer and truck part manufacturer. Our largest exposures remain in the financial and information technology sectors; on a regional basis, we are most exposed to North Asia.
6
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 equities generated strong returns during the six months. Although market volatility increased, the asset class was supported by positive earnings revisions, strong net inflows, and some country-specific developments.
Russia rallied for most of the period on strong oil prices but fell sharply after the United States announced a new set of sanctions against some Russian individuals and associated companies. Brazil benefited from improving economic data and falling interest rates. Greece performed well because of economic growth and credit dynamics. Turkey was the largest underperformer as the lira depreciated significantly. India performed poorly through February and March following the introduction of a long-term capital gains tax, rising inflation estimates, and lower-than-expected earnings, but it rebounded in April and ended the period flat.
The health care and energy sectors performed best; consumer discretionary and telecommunication services lagged. Emerging markets currencies appreciated marginally.
Stock selection in Brazil, South Africa, and India contributed positively, and more than offset negative selection effects in Taiwan. Our underweight exposure to Taiwan and off-index allocation to South Korea helped performance, while our underweight exposures to South Africa and Malaysia detracted. By sector, selection among consumer discretionary, materials, energy, industrial, real estate, and utilities stocks had a positive effect. Stock selection in consumer staples, financials, and telecommunications detracted, as did our overweight allocations to financials and consumer discretionary.
A rotation out of growth stocks and into value stocks occurred during January and continued for the remainder of the period. We believe we are in the early stages of a strong value cycle. We remain constructive and continue to conduct vigorous bottom-up research in order to construct a portfolio of good companies with solid management and strong balance sheets at appropriate valuations.
7
M&G Investment
Management Limited
Portfolio Manager:
Matthew Vaight, UKSIP
Concerns about higher interest rates in the United States, a global trade war, and sanctions on Russia contributed to market turbulence during the review period.
Our portfolio’s allocation to South Africa contributed significantly to relative performance. South Africa’s stock market rallied as investors cheered the election of a new president focused on job creation and economic growth. Amid optimism about potential reforms, shares in Barclays Africa, a financial group; Barloworld, a supplier of industrial equipment; and Imperial Holdings, a car rental and logistics firm, advanced.
Stock selection in the energy sector also added value. Our holdings in Chinese oil and gas firms CNOOC and Sinopec, Russian energy firm Lukoil, and Tullow, a U.K.-listed oil and gas explorer, all climbed as oil prices rose.
In contrast to these successes, several information technology holdings detracted from relative performance, including Delta Electronics, a Taiwanese manufacturer of power supply components and cooling fans. The company is focusing on new higher-growth areas such as industrial automation, but the stock declined amid concerns about the pace of this shift.
Another Taiwanese technology holding, Casetek, also detracted. The company supplies components to Apple, and the stock has been hurt by concerns about weak demand for iPhones.
The fund’s holding in Brazilian toll-road operator CCR also detracted as shares declined on weaker-than-expected revenues and concerns about its possible involvement in a corruption scandal.
Despite the upturn in market turbulence, we remain optimistic that robust global economic growth and improving corporate performance will support emerging market stocks. We continue to favor the cheaper, “value” parts of the market that have been overlooked.
8
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 254,575,796 | 8,033,187 | 96.9% |
Emerson U. Fullwood | 254,454,697 | 8,154,286 | 96.9% |
Amy Gutmann | 254,177,462 | 8,431,521 | 96.8% |
JoAnn Heffernan Heisen | 254,714,031 | 7,894,951 | 97.0% |
F. Joseph Loughrey | 254,633,918 | 7,975,065 | 97.0% |
Mark Loughridge | 254,534,475 | 8,074,507 | 96.9% |
Scott C. Malpass | 254,514,046 | 8,094,936 | 96.9% |
F. William McNabb III | 254,640,222 | 7,968,761 | 97.0% |
Deanna Mulligan | 254,832,344 | 7,776,639 | 97.0% |
André F. Perold | 253,863,549 | 8,745,433 | 96.7% |
Sarah Bloom Raskin | 254,398,748 | 8,210,235 | 96.9% |
Peter F. Volanakis | 254,609,402 | 7,999,581 | 97.0% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Emerging Markets Select Stock | |||||
Fund | 15,367,673 | 871,013 | 803,530 | 1,263,226 | 84.0% |
9
Emerging Markets Select Stock Fund
Fund Profile
As of April 30, 2018
Portfolio Characteristics | |||
MSCI AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Number of Stocks | 317 | 1,039 | 1,862 |
Median Market Cap | $19.9B | $22.9B | $36.0B |
Price/Earnings Ratio | 13.3x | 14.7x | 14.6x |
Price/Book Ratio | 1.4x | 1.8x | 1.7x |
Return on Equity | 13.7% | 16.6% | 12.6% |
Earnings Growth | |||
Rate | 5.1% | 13.6% | 9.6% |
Dividend Yield | 2.5% | 2.4% | 2.8% |
Turnover Rate | |||
(Annualized) | 51% | — | — |
Ticker Symbol | VMMSX | — | — |
Expense Ratio1 | 0.92% | — | — |
Short-Term | |||
Reserves | 1.2% | — | — |
Sector Diversification (% of equity exposure) | |||
MSCI AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Consumer Discretionary | 9.8% | 9.1% | 11.4% |
Consumer Staples | 4.8 | 6.6 | 9.3 |
Energy | 11.1 | 8.8 | 7.1 |
Financials | 25.7 | 26.3 | 23.0 |
Health Care | 1.2 | 2.6 | 7.6 |
Industrials | 5.7 | 5.6 | 11.8 |
Information Technology | 22.2 | 20.7 | 11.5 |
Materials | 8.6 | 8.1 | 8.1 |
Real Estate | 1.5 | 3.8 | 3.2 |
Telecommunication | |||
Services | 4.3 | 5.3 | 4.0 |
Utilities | 5.1 | 3.1 | 3.0 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
Volatility Measures | ||
MSCI AC | ||
FTSE | World | |
Emerging | Index | |
Index | ex USA | |
R-Squared | 0.96 | 0.75 |
Beta | 0.98 | 1.13 |
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% |
China Construction Bank | ||
Corp. | Diversified Banks | 2.8 |
Tencent Holdings Ltd. | Internet Software & | |
Services | 2.4 | |
LUKOIL PJSC | Integrated Oil & Gas | 2.2 |
Alibaba Group Holding | Internet Software & | |
Ltd. | Services | 2.0 |
China Mobile Ltd. | Wireless | |
Telecommunication | ||
Services | 1.5 | |
Petroleo Brasileiro SA | Integrated Oil & Gas | 1.4 |
Baidu Inc. | Internet Software & | |
Services | 1.4 | |
Industrial & Commercial | ||
Bank of China Ltd. | Diversified Banks | 1.3 |
Sberbank of Russia | ||
PJSC | Diversified Banks | 1.3 |
Top Ten | 20.4% | |
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 22, 2018, and represents estimated costs for the current fiscal year. For
the six months ended April 30, 2018, the annualized expense ratio was 0.97%.
10
Emerging Markets Select Stock Fund
Market Diversification (% of equity exposure) | |||
MSCI AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Europe | |||
United Kingdom | 3.1% | 0.0% | 12.2% |
Other | 0.8 | 0.5 | 31.7 |
Subtotal | 3.9% | 0.5% | 43.9% |
Pacific | |||
South Korea | 7.0% | 0.0% | 3.9% |
Hong Kong | 3.3 | 0.0 | 2.5 |
Singapore | 1.0 | 0.0 | 1.0 |
Other | 0.3 | 0.0 | 21.1 |
Subtotal | 11.6% | 0.0% | 28.5% |
Emerging Markets | |||
China | 29.8% | 33.1% | 7.6% |
Taiwan | 10.8 | 12.6 | 2.8 |
Brazil | 9.1 | 8.9 | 1.8 |
India | 7.8 | 11.2 | 2.1 |
Russia | 6.1 | 4.1 | 0.8 |
South Africa | 5.8 | 8.3 | 1.7 |
Indonesia | 2.1 | 2.1 | 0.5 |
Mexico | 1.8 | 3.6 | 0.8 |
Thailand | 1.8 | 3.7 | 0.6 |
Turkey | 1.0 | 1.0 | 0.2 |
Other | 4.0 | 10.2 | 2.0 |
Subtotal | 80.1% | 98.8% | 20.9% |
North America | |||
United States | 4.0% | 0.0% | 0.0% |
Other | 0.4 | 0.0 | 6.2 |
Subtotal | 4.4% | 0.0% | 6.2% |
Middle East | 0.0% | 0.0% | 0.3% |
Other | 0.0% | 0.7% | 0.2% |
11
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, 2018
Note: For 2018, performance data reflect the six months ended April 30, 2018.
Average Annual Total Returns: Periods Ended March 31, 2018
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 | Since | |
Date | Year | Years | Inception | |
Emerging Markets Select Stock Fund | 6/27/2011 | 21.68% | 4.94% | 3.76% |
See Financial Highlights for dividend and capital gains information.
12
Emerging Markets Select Stock Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2018
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks (95.7%)1 | |||
Argentina (0.1%) | |||
YPF SA ADR | 30,833 | 675 | |
Brazil (8.7%) | |||
Itau Unibanco Holding | |||
SA ADR | 462,924 | 6,726 | |
* | Petroleo Brasileiro | ||
SA ADR | 503,179 | 6,617 | |
Telefonica Brasil SA ADR | 250,532 | 3,538 | |
Cia de Saneamento | |||
Basico do Estado de | |||
Sao Paulo | 329,289 | 3,305 | |
Vale SA Class B ADR | 229,775 | 3,180 | |
Ambev SA | 470,108 | 3,131 | |
CVC Brasil Operadora e | |||
Agencia de Viagens SA | 184,763 | 3,058 | |
* | Petroleo Brasileiro SA | ||
Preference Shares | 453,700 | 2,975 | |
Banco Bradesco SA | |||
Preference Shares | 296,802 | 2,929 | |
Itau Unibanco Holding SA | |||
Preference Shares | 196,948 | 2,868 | |
Ambev SA ADR | 409,187 | 2,709 | |
Petrobras Distribuidora SA | 403,245 | 2,643 | |
Cia de Saneamento do | |||
Parana | 128,220 | 2,159 | |
MRV Engenharia e | |||
Participacoes SA | 480,556 | 2,058 | |
CCR SA | 599,534 | 2,047 | |
TOTVS SA | 204,847 | 1,871 | |
*,^ | BRF SA ADR | 251,358 | 1,792 |
Cyrela Brazil Realty SA | |||
Empreendimentos e | |||
Participacoes | 451,297 | 1,791 | |
Usinas Siderurgicas de | |||
Minas Gerais SA | |||
Preference Shares | 453,900 | 1,412 |
EDP - Energias do | ||||
Brasil SA | 341,699 | 1,355 | ||
Gerdau SA Preference | ||||
Shares | 242,900 | 1,154 | ||
Lojas Renner SA | 106,745 | 994 | ||
* | Petroleo Brasileiro SA ADR | 67,114 | 946 | |
Banco do Brasil SA | 74,000 | 775 | ||
Randon Participacoes SA | ||||
Preference Shares | 285,288 | 713 | ||
Localiza Rent a Car SA | 81,200 | 646 | ||
Braskem SA Preference | ||||
Shares | 48,200 | 628 | ||
Magazine Luiza SA | 12,200 | 372 | ||
* | Atacadao Distribuicao | |||
Comercio e Industria Ltda | 59,900 | 258 | ||
64,650 | ||||
Canada (0.4%) | ||||
First Quantum Minerals Ltd. | 171,016 | 2,464 | ||
* | Kinross Gold Corp. | 55,642 | 216 | |
2,680 | ||||
China (28.4%) | ||||
China Construction | ||||
Bank Corp. | 19,798,050 | 20,742 | ||
Tencent Holdings Ltd. | 363,401 | 17,866 | ||
* | Alibaba Group Holding | |||
Ltd. ADR | 81,116 | 14,482 | ||
China Mobile Ltd. | 1,129,500 | 10,760 | ||
* | Baidu Inc. ADR | 41,525 | 10,419 | |
Industrial & Commercial | ||||
Bank of China Ltd. | 11,329,882 | 9,946 | ||
China Resources Power | ||||
Holdings Co. Ltd. | 3,451,683 | 6,621 | ||
CNOOC Ltd. | 3,576,567 | 6,050 | ||
China Pacific Insurance | ||||
Group Co. Ltd. | 1,304,220 | 5,755 | ||
Lenovo Group Ltd. | 11,778,000 | 5,592 | ||
China Longyuan Power | ||||
Group Corp. Ltd. | 5,108,580 | 5,018 |
13
Emerging Markets Select Stock Fund
Market | ||||
Value• | ||||
Shares | ($000) | |||
China Petroleum & | ||||
Chemical Corp. | 4,846,000 | 4,719 | ||
* | Ctrip.com International | |||
Ltd. ADR | 104,243 | 4,264 | ||
Dongfeng Motor Group | ||||
Co. Ltd. | 3,824,000 | 4,229 | ||
China Shenhua Energy | ||||
Co. Ltd. | 1,648,000 | 4,042 | ||
Ping An Insurance Group | ||||
Co. of China Ltd. | 394,130 | 3,851 | ||
China Agri-Industries | ||||
Holdings Ltd. | 8,587,000 | 3,604 | ||
Far East Horizon Ltd. | 3,532,000 | 3,505 | ||
China Dongxiang Group | ||||
Co. Ltd. | 18,622,000 | 3,409 | ||
China Lesso Group | ||||
Holdings Ltd. | 4,309,000 | 3,321 | ||
Guangzhou R&F | ||||
Properties Co. Ltd. | 1,264,000 | 3,005 | ||
PICC Property & | ||||
Casualty Co. Ltd. | 1,616,040 | 2,893 | ||
* | Grand Baoxin Auto | |||
Group Ltd. | 6,812,500 | 2,843 | ||
* | Li Ning Co. Ltd. | 2,517,000 | 2,834 | |
CNOOC Ltd. ADR | 16,289 | 2,753 | ||
Anhui Conch Cement | ||||
Co. Ltd. | 438,000 | 2,734 | ||
* | China Unicom Hong | |||
Kong Ltd. | 1,903,973 | 2,692 | ||
*,2 | Ping An Healthcare and | |||
Technology Co. Ltd. | 8,500 | 59 | ||
China National Building | ||||
Material Co. Ltd. | 2,300,000 | 2,687 | ||
Greatview Aseptic | ||||
Packaging Co. Ltd. | 4,005,000 | 2,654 | ||
China Telecom Corp. | ||||
Ltd. | 5,244,980 | 2,542 | ||
China Shineway | ||||
Pharmaceutical Group | ||||
Ltd. | 1,198,382 | 2,457 | ||
China Oilfield Services | ||||
Ltd. | 2,347,000 | 2,342 | ||
2 | BAIC Motor Corp. Ltd. | 2,057,500 | 1,986 | |
China Railway Group Ltd. | 2,408,000 | 1,930 | ||
* | Datang International | |||
Power Generation Co. | ||||
Ltd. | 5,644,300 | 1,849 | ||
China Merchants Bank | ||||
Co. Ltd. | 421,000 | 1,836 | ||
ENN Energy Holdings Ltd. | 193,512 | 1,810 | ||
Sinopharm Group Co. Ltd. | 418,800 | 1,766 | ||
Brilliance China | ||||
Automotive Holdings | ||||
Ltd. | 912,000 | 1,624 |
Shimao Property Holdings | |||
Ltd. | 604,000 | 1,598 | |
* | JD.com Inc. ADR | 43,459 | 1,587 |
Sunny Optical Technology | |||
Group Co. Ltd. | 88,400 | 1,442 | |
Longfor Properties Co. | |||
Ltd. | 476,821 | 1,426 | |
* | West China Cement Ltd. 5,548,000 | 1,125 | |
2 | China Railway Signal & | ||
Communication Corp. | |||
Ltd. | 1,430,000 | 1,115 | |
Dah Chong Hong | |||
Holdings Ltd. | 1,945,106 | 1,033 | |
* | SINA Corp. | 10,541 | 1,007 |
Huadian Power | |||
International Corp. Ltd. | 1,934,000 | 785 | |
Guangdong Investment | |||
Ltd. | 426,848 | 661 | |
* | China Petroleum & | ||
Chemical Corp. ADR | 6,522 | 636 | |
* | Aluminum Corp. of China | ||
Ltd. | 1,115,427 | 630 | |
*,2,3 Tianhe Chemicals Group | |||
Ltd. | 4,142,000 | 617 | |
Shanghai Fosun | |||
Pharmaceutical Group | |||
Co. Ltd. | 89,795 | 487 | |
CSPC Pharmaceutical | |||
Group Ltd. | 178,800 | 455 | |
Sino Biopharmaceutical | |||
Ltd. | 215,379 | 454 | |
TAL Education Group ADR | 428 | ||
New Oriental Education & | 11,739 | ||
Technology Group Inc. | |||
ADR | 4,187 | 376 | |
China Traditional Chinese | |||
Medicine Holdings Co. | |||
Ltd. | 382,500 | 329 | |
China Resources Phoenix | |||
Healthcare Holdings Co. | |||
Ltd. | 221,300 | 289 | |
Tongda Group Holdings | |||
Ltd. | 982,110 | 217 | |
* | BeiGene Ltd. ADR | 1,100 | 187 |
Shandong Weigao Group | |||
Medical Polymer Co. Ltd. | 261,800 | 161 | |
210,536 | |||
Colombia (0.2%) | |||
* | CEMEX Latam Holdings | ||
SA | 325,775 | 1,004 | |
* | Grupo Energia Bogota | ||
SA ESP | 450,776 | 331 | |
1,335 |
14
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Czech Republic (0.7%) | |||
CEZ AS | 122,825 | 3,137 | |
Komercni banka as | 40,455 | 1,745 | |
4,882 | |||
Greece (0.7%) | |||
* | Alpha Bank AE | 1,253,646 | 3,312 |
Hellenic | |||
Telecommunications | |||
Organization SA | 70,697 | 1,029 | |
Hellenic Petroleum SA | 60,797 | 619 | |
* | National Bank of Greece | ||
SA | 1,057,881 | 440 | |
5,400 | |||
Hong Kong (3.3%) | |||
AIA Group Ltd. | 609,501 | 5,447 | |
Xinyi Solar Holdings Ltd. | 5,286,000 | 2,409 | |
Want Want China | |||
Holdings Ltd. | 2,627,000 | 2,322 | |
First Pacific Co. Ltd. | 4,340,000 | 2,222 | |
* | Pacific Basin Shipping | ||
Ltd. | 7,646,975 | 2,033 | |
Sands China Ltd. | 309,650 | 1,790 | |
Stella International | |||
Holdings Ltd. | 1,374,500 | 1,620 | |
Samsonite International | |||
SA | 343,702 | 1,550 | |
* | MMG Ltd. | 1,953,400 | 1,449 |
Texwinca Holdings Ltd. | 1,769,000 | 890 | |
Singamas Container | |||
Holdings Ltd. | 4,045,077 | 644 | |
* | Precision Tsugami China | ||
Corp. Ltd. | 440,000 | 606 | |
AMVIG Holdings Ltd. | 1,777,578 | 457 | |
Microport Scientific Corp. | 318,037 | 370 | |
AAC Technologies | |||
Holdings Inc. | 22,134 | 318 | |
24,127 | |||
Hungary (0.6%) | |||
OTP Bank Nyrt | 100,233 | 4,370 | |
Magyar Telekom | |||
Telecommunications plc | 227,789 | 394 | |
4,764 | |||
India (7.4%) | |||
Reliance Industries Ltd. | 560,629 | 8,057 | |
ICICI Bank Ltd. ADR | 571,774 | 4,866 | |
State Bank of India | 1,314,930 | 4,836 | |
Infosys Ltd. ADR | 259,907 | 4,593 | |
NTPC Ltd. | 1,772,737 | 4,562 | |
Bank of Baroda | 1,421,724 | 3,152 | |
Axis Bank Ltd. | 301,477 | 2,326 | |
ICICI Bank Ltd. | 509,891 | 2,169 |
Indiabulls Housing | |||
Finance Ltd. | 109,431 | 2,133 | |
NHPC Ltd. | 4,575,851 | 1,946 | |
Bharti Infratel Ltd. | 393,698 | 1,844 | |
Godrej Consumer | |||
Products Ltd. | 79,344 | 1,323 | |
Ambuja Cements Ltd. | 337,367 | 1,264 | |
ACC Ltd. | 46,872 | 1,112 | |
*,2 | Avenue Supermarts Ltd. | 48,786 | 1,083 |
UltraTech Cement Ltd. | 16,857 | 1,034 | |
Power Grid Corp. of India | |||
Ltd. | 306,909 | 953 | |
HDFC Bank Ltd. ADR | 9,254 | 887 | |
* | Tata Motors Ltd. Class A | 299,104 | 853 |
Marico Ltd. | 167,703 | 833 | |
Bharat Electronics Ltd. | 414,434 | 810 | |
* | Punjab National Bank | 515,717 | 734 |
LIC Housing Finance Ltd. | 84,221 | 686 | |
* | Westlife Development Ltd. | 115,837 | 682 |
TAKE Solutions Ltd. | 199,261 | 641 | |
2 | L&T Technology Services | ||
Ltd. | 21,953 | 436 | |
Jubilant Foodworks Ltd. | 10,696 | 405 | |
Indian Oil Corp. Ltd. | 98,504 | 238 | |
Bharat Petroleum Corp. Ltd. | 14,144 | 82 | |
* | Jammu & Kashmir Bank | ||
Ltd. | 94,059 | 80 | |
54,620 | |||
Indonesia (2.0%) | |||
Bank Mandiri Persero | |||
Tbk PT | 7,565,000 | 3,832 | |
Bank Central Asia Tbk | |||
PT | 1,828,100 | 2,891 | |
Bank Rakyat Indonesia | |||
Persero Tbk PT | 10,529,800 | 2,428 | |
* | Semen Indonesia | ||
Persero Tbk PT | 2,167,900 | 1,497 | |
Bank Danamon | |||
Indonesia Tbk PT | 2,950,300 | 1,406 | |
Mitra Adiperkasa Tbk PT | 1,464,924 | 869 | |
Hanjaya Mandala | |||
Sampoerna Tbk PT | 3,059,600 | 775 | |
Bank Tabungan | |||
Pensiunan Nasional | |||
bk PT | 2,710,800 | 569 | |
Pakuwon Jati Tbk PT | 11,028,338 | 466 | |
Sarana Menara | |||
Nusantara Tbk PT | 1,504,100 | 338 | |
Ace Hardware Indonesia | |||
Tbk PT | 594,300 | 56 | |
15,127 |
15
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Japan (0.4%) | |||
Murata Manufacturing | |||
Co. Ltd. | 14,300 | 1,805 | |
* | Nexon Co. Ltd. | 92,624 | 1,348 |
3,153 | |||
Kenya (0.1%) | |||
Equity Group Holdings | |||
Ltd. | 768,500 | 377 | |
Malaysia (0.6%) | |||
Genting Malaysia Bhd. | 2,053,300 | 2,673 | |
Malaysia Airports | |||
Holdings Bhd. | 433,424 | 993 | |
Inari Amertron Bhd. | 776,850 | 336 | |
* | Pentamaster International | ||
Ltd. | 1,396,681 | 201 | |
4,203 | |||
Mexico (1.7%) | |||
Grupo Financiero Banorte | |||
SAB de CV | 625,000 | 3,911 | |
Alfa SAB de CV Class A | 2,819,761 | 3,620 | |
America Movil SAB de | |||
CV | 1,773,300 | 1,641 | |
Alpek SAB de CV | 948,700 | 1,360 | |
Grupo Cementos de | |||
Chihuahua SAB de CV | 131,478 | 765 | |
Gruma SAB de CV Class B | 60,263 | 736 | |
Mexichem SAB de CV | 139,515 | 436 | |
12,469 | |||
Pakistan (0.2%) | |||
United Bank Ltd. | 1,027,805 | 1,784 | |
Philippines (0.4%) | |||
International Container | |||
Terminal Services Inc. | 698,620 | 1,140 | |
*,2 | CEMEX Holdings | ||
Philippines Inc. | 10,094,208 | 698 | |
Pilipinas Shell | |||
Petroleum Corp. | 321,081 | 324 | |
* | Energy Development | ||
Corp. | 3,024,129 | 315 | |
LT Group Inc. | 568,500 | 222 | |
2,699 | |||
Poland (0.3%) | |||
Cyfrowy Polsat SA | 330,061 | 2,407 | |
Portugal (0.1%) | |||
Galp Energia SGPS SA | 50,656 | 972 | |
Russia (5.9%) | |||
Lukoil PJSC ADR | 232,272 | 15,482 | |
Rosneft Oil Co. PJSC | |||
GDR | 1,094,541 | 6,658 |
Sberbank of Russia PJSC | |||
ADR | 422,898 | 6,253 | |
MMC Norilsk Nickel PJSC | |||
ADR | 315,954 | 5,430 | |
Sberbank of Russia PJSC | |||
ADR | 125,380 | 1,852 | |
PhosAgro PJSC GDR | 127,274 | 1,836 | |
Etalon Group plc GDR | 640,014 | 1,829 | |
Sberbank of Russia PJSC | 470,575 | 1,696 | |
LUKOIL PJSC ADR | 13,572 | 894 | |
Inter RAO UES PJSC | 10,869,303 | 691 | |
Tatneft PAO Preference | |||
Shares | 89,010 | 672 | |
Tatneft PJSC ADR | 5,983 | 384 | |
Public Joint Stock | |||
Gazprom Neft ADR | 10,889 | 265 | |
43,942 | |||
Singapore (0.9%) | |||
Wilmar International Ltd. | 1,941,200 | 4,749 | |
Sembcorp Industries Ltd. | 811,300 | 1,869 | |
* | Ezion Holdings Ltd. | 3,192,960 | 286 |
* | Ezion Holdings Ltd. | ||
Warrants Exp. | |||
04/15/2020 | 372,164 | 2 | |
* | Ezion Holdings Ltd. | ||
Warrants Exp. | |||
04/16/2023 | 2,242,476 | — | |
6,906 | |||
South Africa (5.5%) | |||
Sasol Ltd. | 200,272 | 7,159 | |
Barclays Africa Group Ltd. | 280,779 | 4,113 | |
Reunert Ltd. | 621,321 | 3,871 | |
Mr Price Group Ltd. | 135,806 | 2,980 | |
Barloworld Ltd. | 197,539 | 2,668 | |
Imperial Holdings Ltd. | 138,178 | 2,658 | |
Naspers Ltd. | 9,073 | 2,210 | |
Shoprite Holdings Ltd. | 104,635 | 2,082 | |
Sanlam Ltd. | 322,536 | 2,038 | |
AngloGold Ashanti Ltd. | |||
ADR | 222,626 | 1,999 | |
Foschini Group Ltd. | 107,175 | 1,844 | |
FirstRand Ltd. | 314,107 | 1,682 | |
MTN Group Ltd. | 125,685 | 1,261 | |
* | Nampak Ltd. | 1,085,254 | 1,208 |
Nedbank Group Ltd. | 45,379 | 1,082 | |
Vodacom Group Ltd. | 71,577 | 895 | |
Aspen Pharmacare | |||
Holdings Ltd. | 35,011 | 755 | |
40,505 | |||
South Korea (6.5%) | |||
Samsung Electronics Co. | |||
Ltd. | 178,750 | 8,861 | |
Hyundai Motor Co. | 54,481 | 8,126 |
16
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Hana Financial Group Inc. | 133,071 | 5,913 | |
POSCO | 14,969 | 5,158 | |
* | Hyundai Heavy Industries | ||
Co. Ltd. | 35,514 | 3,931 | |
DB Insurance Co. Ltd. | 58,310 | 3,423 | |
Amorepacific Corp. | 9,638 | 3,136 | |
Shinhan Financial Group | |||
Co. Ltd. | 68,930 | 3,069 | |
KB Financial Group Inc. | 46,380 | 2,635 | |
* | Samsung Heavy Industries | ||
Co. Ltd. | 312,534 | 2,136 | |
Kia Motors Corp. | 31,159 | 962 | |
S-Oil Corp. | 6,171 | 633 | |
* | Hugel Inc. | 723 | 339 |
48,322 | |||
Taiwan (10.2%) | |||
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | |||
ADR | 430,537 | 16,554 | |
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | 1,866,266 | 14,216 | |
Hon Hai Precision | |||
Industry Co. Ltd. | 2,024,607 | 5,631 | |
Compal Electronics Inc. | 8,345,000 | 5,436 | |
United Microelectronics | |||
Corp. | 8,620,600 | 4,649 | |
Catcher Technology Co. | |||
Ltd. | 337,296 | 3,741 | |
Chicony Electronics Co. | |||
Ltd. | 1,369,174 | 3,373 | |
Delta Electronics Inc. | 780,531 | 2,830 | |
Cathay Financial Holding | |||
Co. Ltd. | 1,368,000 | 2,454 | |
Teco Electric and | |||
Machinery Co. Ltd. | 2,100,000 | 1,705 | |
Casetek Holdings Ltd. | 688,537 | 1,685 | |
eMemory Technology Inc. | 135,000 | 1,666 | |
Globalwafers Co. Ltd. | 101,442 | 1,637 | |
E.Sun Financial Holding | |||
Co. Ltd. | 2,191,541 | 1,550 | |
Largan Precision Co. Ltd. | 8,000 | 930 | |
Elite Material Co. Ltd. | 374,042 | 917 | |
Sino-American Silicon | |||
Products Inc. | 192,416 | 826 | |
Formosa Sumco | |||
Technology Corp. | 181,000 | 709 | |
Gourmet Master Co. Ltd. | 60,600 | 698 | |
* | Wafer Works Corp. | 417,000 | 651 |
Walsin Technology Corp. | 63,987 | 402 | |
Chroma ATE Inc. | 71,997 | 362 | |
PChome Online Inc. | 75,700 | 351 | |
Yageo Corp. | 16,530 | 346 |
ASPEED Technology Inc. | 12,086 | 345 | ||
Airtac International Group | 18,000 | 312 | ||
Silergy Corp. | 13,369 | 280 | ||
Realtek Semiconductor | ||||
Corp. | 58,930 | 223 | ||
Win Semiconductors Corp. | 25,000 | 187 | ||
Getac Technology Corp. | 124,605 | 179 | ||
Bizlink Holding Inc. | 23,884 | 176 | ||
Pan Jit International Inc. | 83,000 | 140 | ||
LandMark Optoelectronics | ||||
Corp. | 14,464 | 135 | ||
Global Unichip Corp. | 14,181 | 133 | ||
Hota Industrial | ||||
Manufacturing Co. Ltd. | 28,979 | 127 | ||
Kingpak Technology Inc. | 17,698 | 115 | ||
Voltronic Power Technology | ||||
Corp. | 6,430 | 114 | ||
Advanced Ceramic X Corp. | 3,132 | 27 | ||
* | Wafer Works Corp Rights | |||
Exp. 06/08/2018 | 20,811 | 6 | ||
75,818 | ||||
Thailand (1.7%) | ||||
Bangkok Bank PCL | 792,600 | 4,826 | ||
Charoen Pokphand | ||||
Foods PCL (Foreign) | 2,827,300 | 2,182 | ||
* | PTT PCL (Foreign) | 628,000 | 1,120 | |
CP ALL PCL (Foreign) | 402,776 | 1,108 | ||
Bangkok Airways PCL | 2,019,438 | 972 | ||
* | Precious Shipping PCL | 1,780,877 | 747 | |
* | Supalai PCL | 1,005,695 | 738 | |
Land & Houses PCL | 1,724,300 | 600 | ||
Central Pattana PCL | 203,300 | 519 | ||
12,812 | ||||
Turkey (1.0%) | ||||
Akbank Turk AS | 1,879,673 | 3,911 | ||
Haci Omer Sabanci | ||||
Holding AS (Bearer) | 899,954 | 2,128 | ||
Tupras Turkiye Petrol | ||||
Rafinerileri AS | 25,747 | 658 | ||
KOC Holding AS | 116,217 | 393 | ||
*,2 | MLP Saglik Hizmetleri | |||
AS | 57,324 | 239 | ||
7,329 | ||||
United Arab Emirates (0.7%) | ||||
Union National Bank | ||||
PJSC | 3,659,826 | 3,684 | ||
Dubai Financial Market | ||||
PJSC | 4,844,579 | 1,290 | ||
Abu Dhabi National Oil | ||||
Co. for Distribution | ||||
PJSC | 468,375 | 312 | ||
5,286 |
17
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
United Kingdom (3.0%) | |||
Standard Chartered plc | 389,740 | 4,094 | |
Standard Chartered plc | 281,357 | 2,958 | |
* | Tullow Oil plc | 724,891 | 2,269 |
* | KAZ Minerals plc | 161,550 | 2,041 |
Anglo American plc | 80,300 | 1,889 | |
Old Mutual plc | 479,738 | 1,653 | |
Antofagasta plc | 114,474 | 1,530 | |
Coca-Cola HBC AG | 39,346 | 1,318 | |
Petrofac Ltd. | 147,174 | 1,221 | |
* | Bank of Cyprus Holdings | ||
plc | 432,446 | 996 | |
* | Ophir Energy plc | 907,227 | 752 |
O’Key Group SA GDR | 291,808 | 654 | |
Hikma Pharmaceuticals plc | 21,480 | 379 | |
*,2 | DP Eurasia NV | 132,464 | 345 |
Commercial International | |||
Bank Egypt SAE GDR | 52,890 | 271 | |
* | Petra Diamonds Ltd. | 122,886 | 115 |
22,485 | |||
United States (4.0%) | |||
Genpact Ltd. | 118,815 | 3,789 | |
4 | Vanguard FTSE Emerging | ||
Markets ETF | 81,969 | 3,744 | |
Hollysys Automation | |||
Technologies Ltd. | 143,184 | 3,159 | |
Millicom International | |||
Cellular SA | 47,640 | 3,156 | |
Cosan Ltd. | 311,754 | 3,142 | |
* | Azul SA ADR | 72,081 | 2,234 |
Cognizant Technology | |||
Solutions Corp. Class A | 26,803 | 2,193 | |
* | Kosmos Energy Ltd. | 301,919 | 2,125 |
* | Luxoft Holding Inc. Class A | 52,533 | 2,120 |
Southern Copper Corp. | 29,372 | 1,551 | |
* | Flex Ltd. | 102,148 | 1,328 |
* | Yandex NV Class A | 17,733 | 592 |
* | Pampa Energia SA ADR | 6,091 | 347 |
* | Kulicke & Soffa Industries | ||
Inc. | 12,697 | 291 | |
* | Loma Negra Cia Industrial | ||
Argentina SA ADR | 9,574 | 199 | |
29,970 | |||
Total Common Stocks | |||
(Cost $618,671) | 710,235 | ||
Temporary Cash Investments (4.6%)1 | |||
Money Market Fund (4.3%) | |||
5,6 | Vanguard Market | ||
Liquidity Fund, 1.886% | 316,308 | 31,631 |
Face | Market | |
Amount | Value • | |
($000) | ($000) | |
U. S. Government and Agency Obligations (0.3%) | ||
7 United States Treasury Bill, | ||
1.446%, 5/31/18 | 2,350 | 2,347 |
Total Temporary Cash Investments | ||
(Cost $33,974) | 33,978 | |
Total Investments (100.3%) | ||
(Cost $652,645) | 744,213 | |
Other Assets and Liabilities (-0.3%) | ||
Other Assets | 5,446 | |
Liabilities 6 | (8,007) | |
(2,561) | ||
Net Assets (100%) | ||
Applicable to 32,305,442 outstanding | ||
$.001 par value shares of beneficial | ||
interest (unlimited authorization) | 741,652 | |
Net Asset Value Per Share | $22.96 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers | 708,838 | |
Affiliated Vanguard Funds | 35,375 | |
Total Investments in Securities | 744,213 | |
Investments in Vanguard | 42 | |
Receivables for Investment Securities Sold | 1,395 | |
Receivables for Accrued Income | 1,162 | |
Receivables for Capital Shares Issued | 693 | |
Other Assets | 2,154 | |
Total Assets | 749,659 | |
Liabilities | ||
Payables for Investment | ||
Securities Purchased | 2,437 | |
Collateral for Securities on Loan | 1,910 | |
Payables to Investment Advisor | 1,089 | |
Payables for Capital Shares Redeemed | 1,911 | |
Payables to Vanguard | 466 | |
Variation Margin Payable—Futures Contracts 194 | ||
Total Liabilities | 8,007 | |
Net Assets | 741,652 |
18
Emerging Markets Select Stock Fund
At April 30, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 648,601 |
Undistributed Net Investment Income | 300 |
Accumulated Net Realized Gains | 2,095 |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 91,568 |
Futures Contracts | (889) |
Foreign Currencies | (23) |
Net Assets | 741,652 |
• 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 $1,702,000.
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 98.9% and 1.4%, 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, 2018, the aggregate value
of these securities was $6,578,000, representing 0.9% of
net assets.
3 Security value determined using significant
unobservable inputs.
4 Considered an affiliated company of the fund as the issuer is
another member of The Vanguard Group.
5 Affiliated money market fund available only to Vanguard funds
and certain trusts and accounts managed by Vanguard. Rate
shown is the 7-day yield.
6 Includes $1,910,000 of collateral received for securities
on loan.
7 Securities with a value of $1,498,000 have been segregated
as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
19
Emerging Markets Select Stock Fund
Derivative Financial Instruments Outstanding as of Period End | ||||
Futures Contracts | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Long Futures Contracts | ||||
MSCI Emerging Markets Index | June 2018 | 408 | 23,505 | (889) |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Emerging Markets Select Stock Fund
Statement of Operations
Six Months Ended | |
April 30, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends—Unaffiliated Issuers1 | 5,038 |
Dividends—Affiliated Issuers | 42 |
Interest—Unaffiliated Issuers | 18 |
Interest—Affiliated Issuers | 302 |
Securities Lending—Net | 6 |
Total Income | 5,406 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 1,936 |
Performance Adjustment | 123 |
The Vanguard Group—Note C | |
Management and Administrative | 1,145 |
Marketing and Distribution | 70 |
Custodian Fees | 245 |
Shareholders’ Reports and Proxy | 7 |
Trustees’ Fees and Expenses | 1 |
Total Expenses | 3,527 |
Expenses Paid Indirectly | (9) |
Net Expenses | 3,518 |
Net Investment Income | 1,888 |
Realized Net Gain (Loss) | |
Investment Securities Sold—Unaffiliated Issuers | 13,621 |
Investment Securities Sold—Affiliated Issuers | 216 |
Futures Contracts | 2,642 |
Foreign Currencies | (126) |
Realized Net Gain (Loss) | 16,353 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Unaffiliated Issuers | 2,549 |
Investment Securities—Affiliated Issuers | (141) |
Futures Contracts | (1,222) |
Foreign Currencies | (24) |
Change in Unrealized Appreciation (Depreciation) | 1,162 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 19,403 |
1 Dividends are net of foreign withholding taxes of $580,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
21
Emerging Markets Select Stock Fund
Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 1,888 | 9,673 |
Realized Net Gain (Loss) | 16,353 | 18,865 |
Change in Unrealized Appreciation (Depreciation) | 1,162 | 79,670 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 19,403 | 108,208 |
Distributions | ||
Net Investment Income | (10,297) | (4,709) |
Realized Capital Gain | — | — |
Total Distributions | (10,297) | (4,709) |
Capital Share Transactions | ||
Issued | 215,138 | 336,874 |
Issued in Lieu of Cash Distributions | 9,303 | 4,315 |
Redeemed | (137,738) | (138,023) |
Net Increase (Decrease) from Capital Share Transactions | 86,703 | 203,166 |
Total Increase (Decrease) | 95,809 | 306,665 |
Net Assets | ||
Beginning of Period | 645,843 | 339,178 |
End of Period1 | 741,652 | 645,843 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $300,000 and $8,860,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
22
Emerging Markets Select Stock Fund
Financial Highlights
Six Months | ||||||
Ended | ||||||
For a Share Outstanding | April 30, | Year Ended October 31, | ||||
Throughout Each Period | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Asset Value, Beginning of Period | $22.56 | $18.27 | $16.48 | $20.13 | $20.37 | $18.73 |
Investment Operations | ||||||
Net Investment Income | . 0601 | .4131 | .234 | .290 | .264 | .3031 |
Net Realized and Unrealized Gain (Loss) | ||||||
on Investments | .691 | 4.129 | 1.840 | (3.685) | (.242) | 1.567 |
Total from Investment Operations | .751 | 4.542 | 2.074 | (3.395) | .022 | 1.870 |
Distributions | ||||||
Dividends from Net Investment Income | (. 351) | (. 252) | (. 284) | (. 255) | (. 262) | (. 230) |
Distributions from Realized Capital Gains | — | — | — | — | — | — |
Total Distributions | (. 351) | (. 252) | (. 284) | (. 255) | (. 262) | (. 230) |
Net Asset Value, End of Period | $22.96 | $22.56 | $18.27 | $16.48 | $20.13 | $20.37 |
Total Return2 | 3.38% | 25.28% | 12.95% | -16.99% | 0.15% | 10.04% |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $742 | $646 | $339 | $259 | $311 | $223 |
Ratio of Total Expenses to | ||||||
Average Net Assets3 | 0.97% | 0.92% | 0.90% | 0.93% | 0.96% | 0.94% |
Ratio of Net Investment Income to | ||||||
Average Net Assets | 0.44% | 2.04% | 1.57% | 1.59% | 1.53% | 1.55% |
Portfolio Turnover Rate | 51% | 44% | 46% | 49% | 54% | 54% |
The expense ratio, net investment 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.
3 Includes performance-based investment advisory fee increases (decreases) of 0.03%, (0.01%), (0.03%), 0.00%, 0.04%, and 0.02%.
See accompanying Notes, which are an integral part of the Financial Statements.
23
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 are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. 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.
24
Emerging Markets Select Stock Fund
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the six months ended April 30, 2018, the fund’s average investments in long and short futures contracts represented 4% and 0% of net assets, respectively, based on the average of the 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, 2014–2017), and for the period ended April 30, 2018, 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 before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
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.
25
Emerging Markets Select Stock Fund
The fund had no borrowings outstanding at April 30, 2018, 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 Wellington Management Company LLP, Pzena Investment Management, LLC, Oaktree Capital Management L.P., and M&G Investment Management Limited 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, Pzena Investment Management, LLC, Oaktree Capital Management L.P., and M&G Investment Management Limited, are subject to quarterly adjustments based on performance relative to the FTSE Emerging Index for the preceding three years.
Vanguard manages the cash reserves of the fund as described below.
For the six months ended April 30, 2018, the aggregate investment advisory fee represented an effective annual basic rate of 0.53% of the fund’s average net assets, before an increase of $123,000 (0.03%) 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 Assets and Liabilities. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2018, the fund had contributed to Vanguard capital in the amount of $42,000, representing 0.01% of the fund’s net assets and 0.02% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the period ended April 30, 2018, custodian fee offset arrangements reduced the fund’s expenses by $9,000 (an annual rate of 0.00% of average net assets).
E. 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.
26
Emerging Markets Select Stock Fund
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine
the fair value of investments). Any investments valued with significant unobservable inputs are
noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of April 30, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—North and South America | 108,623 | 3,156 | — |
Common Stocks—Other | 67,784 | 530,055 | 617 |
Temporary Cash Investments | 31,631 | 2,347 | — |
Futures Contracts—Liabilities1 | (194) | — | — |
Total | 207,844 | 535,558 | 617 |
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 $32,924,000 based on Level 2 inputs were transferred from Level 1 during the fiscal period.
Additionally, based on values on the date of transfer, securities valued at $44,984,000 based on Level 1 inputs were transferred from Level 2 during the fiscal period.
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. For tax purposes, at October 31, 2017, the fund had available capital losses totaling $13,788,000 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, 2018; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2018, the cost of investment securities for tax purposes was $653,314,000. Net unrealized appreciation of investment securities for tax purposes was $90,899,000, consisting of unrealized gains of $122,523,000 on securities that had risen in value since their purchase and $31,624,000 in unrealized losses on securities that had fallen in value since their purchase.
27
Emerging Markets Select Stock Fund
G. During the six months ended April 30, 2018, the fund purchased $262,789,000 of investment securities and sold $174,442,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were:
Six Months Ended | Year Ended | |
April 30, 2018 | October 31, 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 9,122 | 16,819 |
Issued in Lieu of Cash Distributions | 417 | 250 |
Redeemed | (5,863) | (7,006) |
Net Increase (Decrease) in Shares Outstanding | 3,676 | 10,063 |
I. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:
Current Period Transactions | ||||||||
Oct. 31, | Proceeds | Realized | April 30, | |||||
2017 | from | Net | Change in | Capital Gain | 2018 | |||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Vanguard Market | ||||||||
Liquidity Fund | 37,394 | NA1 | NA1 | (7) | 3 | 302 | — | 31,631 |
Vanguard FTSE | ||||||||
Emerging Markets ETF | 7,249 | 9,636 | 13,220 | 223 | (144) | 42 | — | 3,744 |
Total | 44,643 | 216 | (141) | 344 | — | 35,375 | ||
1 Not applicable—purchases and sales are for temporary cash investment purposes. |
J. Management has determined that no material events or transactions occurred subsequent to April 30, 2018, that would require recognition or disclosure in these financial statements.
28
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.
29
Six Months Ended April 30, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Emerging Markets Select Stock Fund | 10/31/2017 | 4/30/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $1,033.76 | $4.89 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,020.40 | 4.86 |
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 0.97%. 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 (181/365).
30
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. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisors and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and that advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also 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’s fundamental research focuses on companies with strong cash flow generation and attractive returns on capital, seeking to purchase these companies at
31
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 advisor 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. The relative size of each analyst’s subportfolio is roughly proportional to the weight of the analyst’s coverage universe in the fund’s benchmark. This structure is designed to enable the analysts to add value through in-depth fundamental research and understanding of their respective 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 compared with a relevant 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 expense ratio 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 the 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.
32
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.
33
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
34
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 208 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustees1
F. William McNabb III
Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.
Independent Trustees
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
JoAnn Heffernan Heisen
Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).
Brian Dvorak
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Chris D. McIsaac | |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2018, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
CFA® is a registered trademark owned by CFA Institute. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q7522 062018 |
Semiannual Report | April 30, 2018
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 Performance at a Glance. | 1 |
CEO’s Perspective. | 2 |
Advisor’s Report. | 4 |
Results of Proxy Voting. | 7 |
Fund Profile. | 8 |
Performance Summary. | 10 |
Financial Statements. | 11 |
About Your Fund’s Expenses. | 32 |
Trustees Approve Advisory Arrangement. | 34 |
Glossary. | 36 |
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: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard Alternative Strategies Fund returned –1.35% for the six months ended April 30, 2018. Its benchmark, the FTSE 3-month U.S. T-Bill Index + 4%, returned 2.76%.
• The fund seeks to generate returns using a combination of six alternative strategies that are expected to have low correlation with traditional capital markets. These strategies are: long/short equity, event-driven, fixed income, currencies, commodity-linked investments, and equity futures. The fund’s total return is expected to have lower volatility than that of the overall U.S. stock market.
• The biggest driver of performance was our positioning in fixed income futures, which produced the largest losses. Our currency and equity futures strategies were positive contributors; our commodity strategy did not have a significant impact.
• The diversification resulting from the fund’s variety of exposures helped reduce overall volatility. On an annualized basis, the volatility of the fund’s daily returns averaged 3.27%, versus 15.63% for those of the broad U.S. stock market.
Total Returns: Six Months Ended April 30, 2018 | |
Total | |
Returns | |
Vanguard Alternative Strategies Fund | -1.35% |
FTSE 3-month U.S. T-Bill Index + 4% | 2.76 |
1
CEO’s Perspective
Tim Buckley
President and Chief Executive Officer
Dear Shareholder,
I feel extremely fortunate to have the chance to lead a company filled with people who come to work every day passionate about Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
When I joined Vanguard in 1991, I found a mission-driven team focused on improving lives—helping people retire more comfortably, put their children through college, and achieve financial security. I also found a company with purpose in an industry ripe for improvement.
It was clear, even early in my career, that the cards were stacked against most investors. Hidden fees, performance-chasing, and poor advice were relentlessly eroding investors’ dreams.
We knew Vanguard could be different and, as a result, could make a real difference. We have lowered the costs of investing for our shareholders significantly. And we’re proud of the performance of our funds.
Vanguard is built for Vanguard investors—we focus solely on you, our fund shareholders. Everything we do is designed to give our clients the best chance for investment success. In my role as CEO, I’ll keep this priority
2
front and center. We’re proud of what we’ve achieved, but we’re even more excited about what’s to come.
Steady, time-tested guidance
Our guidance for investors, as always, is to stay the course, tune out the hyperbolic headlines, and focus on your goals and what you can control, such as costs and how much you save. This time-tested advice has served our clients well over the decades.
Regardless of how the markets perform in the short term, I’m incredibly optimistic about the future for our investors. We have a dedicated team serving you, and we will never stop striving to make
Vanguard the best place for you to invest through our high-quality funds and services, advice and guidance to help you meet your financial goals, and an experience that makes you feel good about entrusting us with your hard-earned savings.
Thank you for your continued loyalty.
Sincerely,
Mortimer J. Buckley
President and Chief Executive Officer
May 16, 2018
Market Barometer | |||
Total Returns | |||
Periods Ended April 30, 2018 | |||
Six | One | Five Years | |
Months | Year | (Annualized) | |
Stocks | |||
Russell 1000 Index (Large-caps) | 3.83% | 13.17% | 12.84% |
Russell 2000 Index (Small-caps) | 3.27 | 11.54 | 11.74 |
Russell 3000 Index (Broad U.S. market) | 3.79 | 13.05 | 12.75 |
FTSE All-World ex US Index (International) | 3.72 | 15.84 | 5.85 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | -1.87% | -0.32% | 1.47% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | -0.97 | 1.56 | 2.44 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.67 | 1.16 | 0.32 |
CPI | |||
Consumer Price Index | 1.57% | 2.46% | 1.50% |
3
Advisor’s Report
For the six months ended April 30, 2018, Vanguard Alternative Strategies Fund returned –1.35%, trailing the performance of its benchmark, the FTSE 3-month U.S. T-Bill Index + 4%, which returned 2.76%.
Investment objective and strategy
The objective of the Alternative Strategies Fund is to generate positive returns that have a low correlation with the returns of more traditional asset classes such as stocks and bonds and that are less volatile than the overall U.S. stock market. The fund seeks to meet its objective by using a combination of six alternative investment strategies that span multiple asset classes: equities, fixed income, currencies, and commodities.
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. This should produce a portfolio with lower volatility than that of the overall U.S. stock market.
In addition, the fund can use leverage as it seeks to match the expected risk profile for each strategy. Our leverage targets are subject to internal limits. The goal is to achieve a similar risk profile across the portfolio to maximize diversification and performance.
The strategies the fund currently employs are:
• Long/short equity: This approach 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. It seeks to capture a risk-adjusted spread by constructing 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 approach 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: The fund 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 those of countries with strong ones.
4
• Commodity-linked investments: This strategy seeks to capture the risk premium associated with inventory levels of commodities, which are reflected in the prices of their futures contracts. We take long positions in commodities whose prices are expected to rise because of limited inventory and short positions in those whose prices are expected to fall.
• Equity futures: Near the end of the period, a sixth investment strategy was added that uses long and short positions in global equity index futures to capture excess return opportunities. This strategy seeks to benefit from global differences in market and fundamental characteristics by buying equity index futures with strong characteristics and selling equity index futures with poor characteristics.
Investment environment
The period opened with global equities posting positive returns. In the United States, encouraging economic fundamentals, tax-law changes, and low inflation boosted investor sentiment. Europe continued on a path of broad improvement, including high employment and manufacturing activity and elevated consumer confidence. Developed markets in the Asia-Pacific region also rallied, helped by economic and business activity in Japan and Singapore.
As 2018 began, positive economic momentum continued against a backdrop of rising volatility and central bank hawkishness. In the United States, companies began to respond to a new tax law, and strong earnings announcements moved the Standard & Poor’s 500 Index to a record high at the end of January. Developed Europe and Asia-Pacific equities also rose, fueled by improvement in macroeconomic fundamentals.
February brought a sudden change in market sentiment, and investors saw the return of volatility after an unusually long period of calm. From a macroeconomic perspective, it seems that the markets finally realized that the U.S. tax cuts and large government spending package posed upside risks to inflation and could hasten the Federal Reserve’s next interest rate hike (This is on top of pro-growth deregulation.) These stimulus efforts, along with strong economic fundamentals, spurred some of the spike in volatility, as inflation and interest-rate concerns grew.
Successes and shortfalls
Although it’s important to understand the impact of macroeconomic factors on the markets, our process seeks to earn a positive absolute return regardless of market performance while controlling volatility. The fund underperformed its benchmark, but it did achieve low correlations with more traditional asset classes; the correlations of its daily returns with the equity and bond markets were 0.40 and 0.33, respectively. The fund also achieved lower volatility than the overall U.S. stock market.
5
The largest driver of performance during the period was our positioning in fixed income investments, which produced the fund’s biggest losses. Our event-driven and long/short positions produced more modest losses. Our exposure to currencies added diversification to the portfolio, and this helped reduce volatility.
Although markets can be unpredictable, we are confident that our team of experienced managers and analysts can find opportunities to produce competitive returns over the long term at volatility levels lower than those of the market. We look forward to serving our investors in the future.
Portfolio Managers:
Anatoly Shtekhman, CFA
Fei Xu, CFA
Vanguard Quantitative Equity Group
May 18, 2018
6
Results of Proxy Voting
At a special meeting of shareholders on November 15, 2017, fund shareholders approved the following proposals:
Proposal 1—Elect trustees for the fund.*
The individuals listed in the table below were elected as trustees for the fund. All trustees with the exception of Ms. Mulligan, Ms. Raskin, and Mr. Buckley (each of whom already serves as a director of The Vanguard Group, Inc.) served as trustees to the funds prior to the shareholder meeting.
Percentage | |||
Trustee | For | Withheld | For |
Mortimer J. Buckley | 254,575,796 | 8,033,187 | 96.9% |
Emerson U. Fullwood | 254,454,697 | 8,154,286 | 96.9% |
Amy Gutmann | 254,177,462 | 8,431,521 | 96.8% |
JoAnn Heffernan Heisen | 254,714,031 | 7,894,951 | 97.0% |
F. Joseph Loughrey | 254,633,918 | 7,975,065 | 97.0% |
Mark Loughridge | 254,534,475 | 8,074,507 | 96.9% |
Scott C. Malpass | 254,514,046 | 8,094,936 | 96.9% |
F. William McNabb III | 254,640,222 | 7,968,761 | 97.0% |
Deanna Mulligan | 254,832,344 | 7,776,639 | 97.0% |
André F. Perold | 253,863,549 | 8,745,433 | 96.7% |
Sarah Bloom Raskin | 254,398,748 | 8,210,235 | 96.9% |
Peter F. Volanakis | 254,609,402 | 7,999,581 | 97.0% |
* Results are for all funds within the same trust. |
Proposal 3—Approve a manager-of-managers arrangement with wholly owned subsidiaries of Vanguard.
This arrangement enables Vanguard or the fund to enter into and materially amend investment advisory arrangements with wholly owned subsidiaries of Vanguard, subject to the approval of the fund’s board of trustees and any conditions imposed by the Securities and Exchange Commission (SEC), while avoiding the costs and delays associated with obtaining future shareholder approval. The ability of the fund to operate in this manner is contingent upon the SEC’s approval of a pending application for an order of exemption.
Broker | Percentage | ||||
Vanguard Fund | For | Abstain | Against | Non-Votes | For |
Alternative Strategies Fund | 12,525,432 | 0 | 0 | 0 | 100.0% |
7
Alternative Strategies Fund
Fund Profile
As of April 30, 2018
Fund Characteristics | |
Ticker Symbol | VASFX |
Total Expense Ratio1 | 0.79% |
Management Expenses | 0.26% |
Dividend Expenses on Securities | |
Sold Short2 | 0.44% |
Borrowing Expenses on Securities | |
Sold Short2 | 0.00% |
Other Expenses | 0.09% |
Turnover Rate (Annualized) | 150% |
Short-Term Reserves | 28.4% |
Portfolio Characteristics | ||
Long | Short | |
Portfolio | Portfolio | |
Number of Stocks | 292 | 178 |
Median Market Cap | $5.5B | $7.4B |
Price/Earnings Ratio | 22.0x | 13.6x |
Price/Book Ratio | 2.6x | 1.9x |
Return on Equity | 8.5% | 5.2% |
Earnings Growth | ||
Rate | 7.5% | 8.5% |
Foreign Holdings | 11.7% | 0.3% |
Sector Diversification (% of equity exposure) | ||
Long | Short | |
Portfolio | Portfolio | |
Consumer Discretionary | 11.6% | 17.2% |
Consumer Staples | 3.0 | 2.2 |
Energy | 3.0 | 23.3 |
Financials | 13.6 | 9.0 |
Health Care | 15.0 | 10.9 |
Industrials | 15.4 | 8.3 |
Information Technology | 20.3 | 17.0 |
Materials | 4.5 | 3.3 |
Real Estate | 4.7 | 1.6 |
Telecommunication Services | 0.2 | 2.6 |
Utilities | 8.7 | 4.6 |
Sector categories are based on the Global Industry Classification
Standard (“GICS”), except for the “Other” category (if applicable),
which includes securities that have not been provided a GICS
classification as of the effective reporting period.
1 The total expense ratio shown is from the prospectus dated February 22, 2018, and represents estimated costs for the current fiscal
year. For the six months ended April 30, 2018, the annualized expense ratio was 0.62%.
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.
8
Alternative Strategies Fund
Ten Largest Holdings1 (% of total net assets) | ||
Long Portfolio | ||
RSP Permian Inc. | Oil & Gas Exploration | |
& Production | 1.2% | |
Analogic Corp. | Health Care | |
Equipment | 1.1 | |
Monsanto Co. | Fertilizers & | |
Agricultural | ||
Chemicals | 1.1 | |
Avexis Inc. | Biotechnology | 1.1 |
Infinity Property & | Property & Casualty | |
Casualty Corp. | Insurance | 1.1 |
General Cable Corp. | Electrical | |
Components & | ||
Equipment | 1.1 | |
Orbital ATK Inc. | Aerospace & | |
Defense | 1.1 | |
AmTrust Financial | Property & Casualty | |
Services Inc. | Insurance | 1.1 |
Avista Corp. | Multi-Utilities | 1.1 |
Blackhawk Network | Data Processing & | |
Holdings Inc. | Outsourced Services | 1.1 |
Top Ten | 11.1% |
Ten Largest Holdings1 (% of total net assets) | ||
Short Portfolio | ||
Concho Resources Inc. | Oil & Gas | |
Exploration & | ||
Production | 1.3% | |
McDermott International | Oil & Gas | |
Inc. | Equipment & | |
Services | 1.1 | |
Kemper Corp. | Multi-Line | |
Insurance | 0.7 | |
Marvell Technology | ||
Group Ltd. | Semiconductors | 0.6 |
Dominion Energy Inc. | Multi-Utilities | 0.5 |
KLA-Tencor Corp. | Semiconductor | |
Equipment | 0.4 | |
Penn National Gaming | ||
Inc. | Casinos & Gaming | 0.4 |
AT&T Inc. | Integrated | |
Telecommunication | ||
Services | 0.4 | |
Lumentum Holdings Inc. | Communications | |
Equipment | 0.4 | |
United Technologies | Aerospace & | |
Corp. | Defense | 0.3 |
Top Ten | 6.1% |
1 The holdings listed exclude any temporary cash investments and equity index products.
9
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-Year Total Returns (%): August 11, 2015, Through April 30, 2018
Note: For 2018, performance data reflect the six months ended April 30, 2018.
Average Annual Total Returns: Periods Ended March 31, 2018
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 | |
Alternative Strategies Fund | 8/11/2015 | -0.05% | 1.98% |
See Financial Highlights for dividend and capital gains information.
10
Alternative Strategies Fund
Consolidated Financial Statements (unaudited)
Consolidated Statement of Net Assets
As of April 30, 2018
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
Market | |||
Value• | |||
Shares | ($000) | ||
Common Stocks—Long Positions (62.2%) | |||
Consumer Discretionary (7.2%) | |||
* | Pinnacle Entertainment | ||
Inc. | 100,000 | 3,212 | |
* | Yoox Net-A-Porter | ||
Group SPA | 62,000 | 2,837 | |
Sky plc | 142,835 | 2,710 | |
Mantra Group Ltd. | 885,000 | 2,628 | |
Time Warner Inc. | 26,000 | 2,465 | |
Tribune Media Co. | |||
Class A | 63,000 | 2,381 | |
Finish Line Inc. Class A | 120,000 | 1,628 | |
† | McDonald’s Corp. | 1,874 | 314 |
† | Home Depot Inc. | 1,653 | 305 |
Yum! Brands Inc. | 3,417 | 298 | |
* | Madison Square Garden | ||
Co. Class A | 1,204 | 293 | |
Choice Hotels | |||
International Inc. | 3,645 | 292 | |
Garmin Ltd. | 4,966 | 291 | |
Hilton Worldwide | |||
Holdings Inc. | 3,650 | 288 | |
Service Corp. | |||
International | 7,821 | 285 | |
Walt Disney Co. | 2,807 | 282 | |
Graham Holdings Co. | |||
Class B | 466 | 281 | |
Carnival Corp. | 4,391 | 277 | |
Marriott International | |||
Inc. Class A | 2,022 | 276 | |
* | Bright Horizons Family | ||
Solutions Inc. | 2,844 | 270 | |
Vail Resorts Inc. | 1,172 | 269 | |
Aramark | 7,154 | 267 | |
Cable One Inc. | 404 | 257 | |
* | Mohawk Industries Inc. | 1,107 | 232 |
Starbucks Corp. | 4,000 | 230 |
John Wiley & Sons Inc. | |||
Class A | 3,260 | 215 | |
Comcast Corp. Class A | 4,948 | 155 | |
Leggett & Platt Inc. | 3,596 | 146 | |
23,384 | |||
Consumer Staples (1.9%) | |||
Lamb Weston Holdings | |||
Inc. | 4,854 | 317 | |
* | US Foods Holding Corp. | 8,877 | 303 |
Constellation Brands Inc. | |||
Class A | 1,301 | 303 | |
Coca-Cola Co. | 6,892 | 298 | |
Estee Lauder Cos. Inc. | |||
Class A | 2,010 | 298 | |
Kimberly-Clark Corp. | 2,774 | 287 | |
Church & Dwight Co. | |||
Inc. | 6,172 | 285 | |
Sysco Corp. | 4,520 | 283 | |
McCormick & Co. Inc. | 2,642 | 279 | |
Pinnacle Foods Inc. | 4,573 | 276 | |
Procter & Gamble Co. | 3,809 | 276 | |
Colgate-Palmolive Co. | 4,211 | 275 | |
PepsiCo Inc. | 2,718 | 274 | |
Mondelez International | |||
Inc. Class A | 6,879 | 272 | |
Clorox Co. | 2,277 | 267 | |
Hershey Co. | 2,875 | 264 | |
Ingredion Inc. | 2,169 | 263 | |
Kraft Heinz Co. | 4,232 | 239 | |
Conagra Brands Inc. | 6,321 | 234 | |
Campbell Soup Co. | 5,348 | 218 | |
Altria Group Inc. | 3,758 | 211 | |
Philip Morris | |||
International Inc. | 2,444 | 200 | |
Walgreens Boots | |||
Alliance Inc. | 1,612 | 107 | |
6,029 |
11
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Energy (1.8%) | |||
* | RSP Permian Inc. | 81,000 | 4,018 |
† | Phillips 66 | 3,047 | 339 |
Valero Energy Corp. | 2,970 | 330 | |
Chevron Corp. | 2,520 | 315 | |
Occidental Petroleum | |||
Corp. | 3,971 | 307 | |
Exxon Mobil Corp. | 3,591 | 279 | |
Schlumberger Ltd. | 3,634 | 249 | |
Kinder Morgan Inc. | 9,638 | 153 | |
5,990 | |||
Financials (8.4%) | |||
Infinity Property & | |||
Casualty Corp. | 27,208 | 3,591 | |
AmTrust Financial | |||
Services Inc. | 277,000 | 3,571 | |
XL Group Ltd. | 63,000 | 3,502 | |
* | PHH Corp. | 329,270 | 3,494 |
Validus Holdings Ltd. | 51,000 | 3,456 | |
Stewart Information | |||
Services Corp. | 24,000 | 1,001 | |
Allstate Corp. | 3,127 | 306 | |
Arthur J Gallagher & Co. | 4,366 | 306 | |
Loews Corp. | 5,799 | 304 | |
American Express Co. | 3,055 | 302 | |
Aflac Inc. | 6,614 | 301 | |
American Financial | |||
Group Inc. | 2,653 | 300 | |
Brown & Brown Inc. | 10,850 | 295 | |
† | Progressive Corp. | 4,896 | 295 |
Starwood Property | |||
Trust Inc. | 14,046 | 294 | |
Nasdaq Inc. | 3,328 | 294 | |
S&P Global Inc. | 1,558 | 294 | |
White Mountains | |||
Insurance Group Ltd. | 339 | 293 | |
Aon plc | 2,058 | 293 | |
* | Markel Corp. | 258 | 292 |
Marsh & McLennan | |||
Cos. Inc. | 3,542 | 289 | |
Torchmark Corp. | 3,252 | 282 | |
* | Berkshire Hathaway Inc. | ||
Class B | 1,436 | 278 | |
WR Berkley Corp. | 3,709 | 277 | |
Hartford Financial | |||
Services Group Inc. | 5,087 | 274 | |
MFA Financial Inc. | 36,100 | 271 | |
Chubb Ltd. | 1,923 | 261 | |
Old Republic | |||
International Corp. | 12,716 | 259 | |
Willis Towers Watson plc | 1,730 | 257 | |
AGNC Investment Corp. | 13,080 | 247 | |
SEI Investments Co. | 3,904 | 247 | |
Erie Indemnity Co. | |||
Class A | 2,078 | 243 |
* | Arch Capital Group Ltd. | 2,990 | 240 |
Annaly Capital | |||
Management Inc. | 23,028 | 239 | |
US Bancorp | 4,583 | 231 | |
Travelers Cos. Inc. | 1,723 | 227 | |
American International | |||
Group Inc. | 3,742 | 210 | |
First American Financial | |||
Corp. | 3,184 | 163 | |
TFS Financial Corp. | 9,278 | 138 | |
27,417 | |||
Health Care (9.3%) | |||
Analogic Corp. | 44,000 | 3,656 | |
* | Avexis Inc. | 17,000 | 3,615 |
* | Ablynx NV | 55,000 | 2,965 |
Sirtex Medical Ltd. | 137,000 | 2,865 | |
* | TiGenix NV | 1,331,880 | 2,835 |
* | NxStage Medical Inc. | 95,100 | 2,532 |
* | Viralytics Ltd. | 1,000,000 | 1,288 |
* | Express Scripts | ||
Holding Co. | 16,000 | 1,211 | |
Aetna Inc. | 6,000 | 1,074 | |
* | iKang Healthcare | ||
Group Inc. ADR | 50,000 | 997 | |
LifeHealthcare | |||
Group Ltd. | 300,000 | 817 | |
Anthem Inc. | 1,347 | 318 | |
Stryker Corp. | 1,857 | 315 | |
Eli Lilly & Co. | 3,838 | 311 | |
STERIS plc | 3,255 | 308 | |
* | Laboratory Corp. of | ||
America Holdings | 1,791 | 306 | |
UnitedHealth Group Inc. | 1,291 | 305 | |
Bio-Techne Corp. | 1,997 | 301 | |
Becton Dickinson | |||
and Co. | 1,299 | 301 | |
Pfizer Inc. | 8,158 | 299 | |
Zoetis Inc. | 3,558 | 297 | |
Baxter International Inc. | 4,235 | 294 | |
Medtronic plc | 3,639 | 292 | |
Thermo Fisher Scientific | |||
Inc. | 1,365 | 287 | |
Danaher Corp. | 2,825 | 283 | |
Abbott Laboratories | 4,871 | 283 | |
Agilent Technologies Inc. | 4,110 | 270 | |
Johnson & Johnson | 2,130 | 269 | |
* | IQVIA Holdings Inc. | 2,793 | 268 |
* | Mettler-Toledo | ||
International Inc. | 470 | 263 | |
Quest Diagnostics Inc. | 2,562 | 259 | |
PerkinElmer Inc. | 3,195 | 234 | |
* | Boston Scientific Corp. | 7,551 | 217 |
* | Premier Inc. Class A | 1,499 | 50 |
* | Kindred Healthcare Inc. | 3,100 | 28 |
30,213 |
12
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Industrials (9.6%) | |||
General Cable Corp. | 121,000 | 3,588 | |
Orbital ATK Inc. | 27,000 | 3,574 | |
Chicago Bridge & Iron | |||
Co. NV | 228,000 | 3,443 | |
Rockwell Collins Inc. | 24,000 | 3,181 | |
Aecon Group Inc. | 160,000 | 2,249 | |
Student Transportation | |||
Inc. | 280,000 | 2,094 | |
* | Sparton Corp. | 112,000 | 2,069 |
Hardinge Inc. | 101,359 | 1,859 | |
Tox Free Solutions Ltd. | 233,249 | 604 | |
* | Verisk Analytics Inc. | ||
Class A | 2,876 | 306 | |
BWX Technologies Inc. | 4,422 | 300 | |
* | IHS Markit Ltd. | 6,044 | 297 |
Expeditors International | |||
of Washington Inc. | 4,638 | 296 | |
† | CH Robinson | ||
Worldwide Inc. | 3,212 | 296 | |
Harris Corp. | 1,838 | 287 | |
United Technologies | |||
Corp. | 2,335 | 281 | |
Rollins Inc. | 5,771 | 280 | |
Raytheon Co. | 1,362 | 279 | |
Watsco Inc. | 1,666 | 279 | |
Xylem Inc. | 3,825 | 279 | |
Roper Technologies Inc. | 1,054 | 278 | |
Republic Services Inc. | |||
Class A | 4,303 | 278 | |
Honeywell International | |||
Inc. | 1,907 | 276 | |
IDEX Corp. | 2,050 | 274 | |
Allegion plc | 3,519 | 272 | |
Northrop Grumman Corp. | 839 | 270 | |
Waste Management Inc. | 3,271 | 266 | |
Fortive Corp. | 3,770 | 265 | |
AMETEK Inc. | 3,744 | 261 | |
Lockheed Martin Corp. | 812 | 260 | |
KAR Auction Services | |||
Inc. | 5,008 | 260 | |
General Dynamics Corp. | 1,282 | 258 | |
Illinois Tool Works Inc. | 1,800 | 256 | |
Hogg Robinson Group | |||
plc | 156,940 | 255 | |
Toro Co. | 4,323 | 252 | |
Stanley Black & Decker | |||
Inc. | 1,773 | 251 | |
3M Co. | 1,273 | 247 | |
JB Hunt Transport | |||
Services Inc. | 2,013 | 236 | |
Hubbell Inc. Class B | 2,182 | 227 | |
Snap-on Inc. | 1,429 | 208 | |
Cummins Inc. | 477 | 76 | |
31,067 |
Information Technology (12.7%) | |||
* | Blackhawk Network | ||
Holdings Inc. | 78,000 | 3,502 | |
* | VeriFone Systems Inc. | 151,800 | 3,493 |
* | CommerceHub Inc. | 153,000 | 3,469 |
* | Microsemi Corp. | 53,000 | 3,429 |
Gemalto NV | 55,000 | 3,312 | |
* | Orbotech Ltd. | 54,000 | 3,155 |
* | MuleSoft Inc. Class A | 68,000 | 3,031 |
* | NXP Semiconductors | ||
NV | 28,000 | 2,937 | |
* | Oclaro Inc. | 360,000 | 2,851 |
* | Cavium Inc. | 38,000 | 2,850 |
* | Sigma Designs Inc. | 172,100 | 1,084 |
† | Intuit Inc. | 1,707 | 315 |
Visa Inc. Class A | 2,457 | 312 | |
* | CoreLogic Inc. | 6,282 | 311 |
* | Tyler Technologies Inc. | 1,387 | 304 |
* | salesforce.com Inc. | 2,504 | 303 |
Mastercard Inc. | |||
Class A | 1,682 | 300 | |
Cisco Systems Inc. | 6,762 | 300 | |
Cognizant Technology | |||
Solutions Corp. Class A | 3,650 | 299 | |
† | Microsoft Corp. | 3,172 | 297 |
Broadridge Financial | |||
Solutions Inc. | 2,759 | 296 | |
Amdocs Ltd. | 4,391 | 295 | |
* | VeriSign Inc. | 2,453 | 288 |
* | Fiserv Inc. | 4,056 | 287 |
* | Synopsys Inc. | 3,279 | 280 |
Jack Henry & | |||
Associates Inc. | 2,339 | 279 | |
FLIR Systems Inc. | 5,174 | 277 | |
CDW Corp. | 3,848 | 274 | |
Genpact Ltd. | 8,601 | 274 | |
† | Accenture plc Class A | 1,814 | 274 |
Fidelity National | |||
Information Services | |||
Inc. | 2,852 | 271 | |
Paychex Inc. | 4,436 | 269 | |
International Business | |||
Machines Corp. | 1,815 | 263 | |
* | EchoStar Corp. Class A | 4,974 | 261 |
Amphenol Corp. Class A | 3,114 | 261 | |
Corning Inc. | 9,165 | 248 | |
Motorola Solutions Inc. | 2,180 | 239 | |
National Instruments | |||
Corp. | 5,809 | 238 | |
CDK Global Inc. | 3,252 | 212 | |
Western Union Co. | 8,834 | 175 | |
41,115 |
13
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Materials (2.8%) | |||
Monsanto Co. | 29,000 | 3,636 | |
Ecolab Inc. | 2,160 | 313 | |
Praxair Inc. | 2,009 | 306 | |
WR Grace & Co. | 4,451 | 305 | |
Ball Corp. | 7,579 | 304 | |
Silgan Holdings Inc. | 10,458 | 294 | |
Avery Dennison Corp. | 2,780 | 291 | |
Air Products & | |||
Chemicals Inc. | 1,793 | 291 | |
AptarGroup Inc. | 3,104 | 290 | |
RPM International Inc. | 5,988 | 289 | |
Eastman Chemical Co. | 2,830 | 289 | |
Packaging Corp. of | |||
America | 2,488 | 288 | |
Sonoco Products Co. | 5,568 | 286 | |
Ashland Global | |||
Holdings Inc. | 4,243 | 281 | |
PPG Industries Inc. | 2,633 | 279 | |
* | Berry Global Group Inc. | 5,046 | 277 |
Sherwin-Williams Co. | 749 | 275 | |
* | Crown Holdings Inc. | 5,385 | 268 |
NewMarket Corp. | 692 | 263 | |
International Flavors & | |||
Fragrances Inc. | 1,420 | 201 | |
9,026 | |||
Other (0.0%) | |||
*,1 | Dyax Corp. CVR | ||
Exp. 12/31/2019 | 28,700 | 57 | |
Real Estate (2.9%) | |||
Pure Industrial Real | |||
Estate Trust | 470,000 | 2,958 | |
UDR Inc. | 8,557 | 309 | |
WP Carey Inc. | 4,823 | 308 | |
American Homes 4 | |||
Rent Class A | 15,035 | 304 | |
Columbia Property | |||
Trust Inc. | 14,128 | 302 | |
Duke Realty Corp. | 11,060 | 300 | |
AvalonBay | |||
Communities Inc. | 1,834 | 299 | |
Brandywine Realty Trust | 18,538 | 298 | |
Equity LifeStyle | |||
Properties Inc. | 3,343 | 298 | |
Invitation Homes Inc. | 12,858 | 297 | |
* | Equity Commonwealth | 9,548 | 296 |
* | Howard Hughes Corp. | 2,186 | 296 |
Gaming and Leisure | |||
Properties Inc. | 8,578 | 294 | |
Douglas Emmett Inc. | 7,852 | 292 |
Park Hotels & Resorts | ||
Inc. | 10,102 | 291 |
Liberty Property Trust | 6,874 | 287 |
Equity Residential | 4,615 | 285 |
Sun Communities Inc. | 2,972 | 279 |
Essex Property Trust Inc. | 1,047 | 251 |
Camden Property Trust | 2,838 | 242 |
Mid-America Apartment | ||
Communities Inc. | 2,528 | 231 |
Apple Hospitality REIT | ||
Inc. | 12,839 | 231 |
Welltower Inc. | 4,321 | 231 |
Highwoods Properties | ||
Inc. | 4,560 | 201 |
Simon Property Group | ||
Inc. | 657 | 103 |
9,483 | ||
Telecommunication Services (0.2%) | ||
TDC A/S | 40,000 | 325 |
AT&T Inc. | 5,852 | 192 |
517 | ||
Utilities (5.4%) | ||
Avista Corp. | 68,000 | 3,527 |
WGL Holdings Inc. | 39,103 | 3,328 |
Vectren Corp. | 33,600 | 2,361 |
SCANA Corp. | 40,000 | 1,471 |
Connecticut Water | ||
Service Inc. | 10,000 | 680 |
Atmos Energy Corp. | 3,630 | 315 |
Xcel Energy Inc. | 6,684 | 313 |
Duke Energy Corp. | 3,899 | 313 |
WEC Energy Group Inc. | 4,854 | 312 |
Consolidated Edison Inc. | 3,890 | 312 |
American Electric | ||
Power Co. Inc. | 4,418 | 309 |
Eversource Energy | 5,030 | 303 |
NextEra Energy Inc. | 1,846 | 303 |
CMS Energy Corp. | 6,367 | 300 |
Westar Energy Inc. | ||
Class A | 5,475 | 297 |
Dominion Energy Inc. | 4,357 | 290 |
DTE Energy Co. | 2,694 | 284 |
Sempra Energy | 2,492 | 279 |
Hawaiian Electric | ||
Industries Inc. | 7,961 | 276 |
CenterPoint Energy Inc. | 10,788 | 273 |
UGI Corp. | 5,253 | 254 |
Southern Co. | 5,447 | 251 |
Alliant Energy Corp. | 5,767 | 248 |
Ameren Corp. | 3,500 | 205 |
American Water Works | ||
Co. Inc. | 2,309 | 200 |
14
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Pinnacle West Capital | |||
Corp. | 2,316 | 186 | |
Aqua America Inc. | 5,158 | 181 | |
PPL Corp. | 5,123 | 149 | |
Avangrid Inc. | 2,317 | 122 | |
17,642 | |||
Total Common Stocks— | |||
Long Positions (Cost $193,789) | 201,940 | ||
Common Stocks Sold Short (-20.7%) | |||
Consumer Discretionary (-3.6%) | |||
* | Penn National Gaming | ||
Inc. | (42,000) | (1,273) | |
Sinclair Broadcast | |||
Group Inc. Class A | (14,490) | (411) | |
* | Lululemon Athletica Inc. | (3,708) | (370) |
* | Michael Kors Holdings | ||
Ltd. | (4,750) | (325) | |
Expedia Group Inc. | (2,789) | (321) | |
* | Floor & Decor Holdings | ||
Inc. Class A | (5,759) | (320) | |
* | Urban Outfitters Inc. | (7,884) | (317) |
* | Discovery | ||
Communications Inc. | (14,186) | (315) | |
Macy’s Inc. | (10,128) | (315) | |
Wynn Resorts Ltd. | (1,683) | (313) | |
* | Chipotle Mexican Grill | ||
Inc. Class A | (734) | (311) | |
* | Liberty Expedia | ||
Holdings Inc. Class A | (7,597) | (310) | |
International Game | |||
Technology plc | (10,753) | (304) | |
Best Buy Co. Inc. | (3,945) | (302) | |
Newell Brands Inc. | (10,783) | (298) | |
H&R Block Inc. | (10,728) | (297) | |
* | Sally Beauty Holdings | ||
Inc. | (17,135) | (296) | |
Ralph Lauren Corp. | |||
Class A | (2,648) | (291) | |
* | Netflix Inc. | (928) | (290) |
* | O’Reilly Automotive Inc. | (1,106) | (283) |
Foot Locker Inc. | (6,565) | (283) | |
Viacom Inc. Class B | (9,353) | (282) | |
Dick’s Sporting Goods | |||
Inc. | (8,510) | (282) | |
Advance Auto Parts Inc. | (2,452) | (281) | |
Kohl’s Corp. | (4,409) | (274) | |
Gap Inc. | (9,163) | (268) | |
* | TripAdvisor Inc. | (7,104) | (266) |
Goodyear Tire & | |||
Rubber Co. | (10,288) | (258) |
* | Qurate Retail Group Inc. | ||
QVC Group Class A | (10,553) | (247) | |
* | Wayfair Inc. | (3,959) | (247) |
* | Liberty Media Corp- | ||
Liberty Formula One | (8,294) | (245) | |
Adient plc | (3,870) | (237) | |
* | Michaels Cos. Inc. | (12,475) | (232) |
Bed Bath & Beyond Inc. | (13,114) | (229) | |
Thor Industries Inc. | (2,093) | (222) | |
L Brands Inc. | (6,240) | (218) | |
* | Skechers U. S. A. Inc. | ||
Class A | (7,561) | (215) | |
(11,548) | |||
Consumer Staples (-0.6%) | |||
CVS Health Corp. | (5,026) | (351) | |
* | TreeHouse Foods Inc. | (7,853) | (302) |
* | Sprouts Farmers | ||
Market Inc. | (12,041) | (301) | |
Bunge Ltd. | (3,921) | (283) | |
Coty Inc. Class A | (15,940) | (277) | |
Kroger Co. | (10,427) | (263) | |
* | Hain Celestial Group Inc. | (1,546) | (45) |
(1,822) | |||
Energy (-4.8%) | |||
* | Concho Resources Inc. | (25,920) | (4,075) |
* | McDermott | ||
International Inc. | (563,663) | (3,720) | |
SM Energy Co. | (16,043) | (384) | |
* | Laredo Petroleum Inc. | (33,368) | (367) |
Whiting Petroleum Corp. | (8,759) | (358) | |
* | WPX Energy Inc. | (20,776) | (355) |
* | QEP Resources Inc. | (28,375) | (346) |
* | Newfield Exploration Co. | (11,568) | (345) |
Patterson-UTI Energy | |||
Inc. | (15,860) | (340) | |
PBF Energy Inc. Class A | (8,778) | (336) | |
* | Continental Resources | ||
Inc. | (5,058) | (334) | |
* | Kosmos Energy Ltd. | (46,843) | (330) |
Devon Energy Corp. | (9,054) | (329) | |
Hess Corp. | (5,665) | (323) | |
Oceaneering | |||
International Inc. | (15,115) | (321) | |
* | Parsley Energy Inc. | ||
Class A | (10,454) | (314) | |
* | Extraction Oil & Gas Inc. | (22,169) | (313) |
Marathon Oil Corp. | (16,848) | (307) | |
Apache Corp. | (7,332) | (300) | |
Noble Energy Inc. | (8,701) | (294) | |
* | Gulfport Energy Corp. | (30,736) | (286) |
CNX Resources Corp. | (18,976) | (282) | |
* | Transocean Ltd. | (22,686) | (281) |
15
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Nabors Industries Ltd. | (36,842) | (280) | |
* | Southwestern Energy Co. | (66,650) | (273) |
Range Resources Corp. | (19,704) | (273) | |
World Fuel Services | |||
Corp. | (12,486) | (268) | |
(15,734) | |||
Financials (-1.9%) | |||
Kemper Corp. | (32,701) | (2,207) | |
* | SVB Financial Group | (1,164) | (349) |
TCF Financial Corp. | (13,067) | (324) | |
Santander Consumer | |||
USA Holdings Inc. | (17,099) | (316) | |
Popular Inc. | (6,681) | (309) | |
PacWest Bancorp | (5,943) | (305) | |
* | SLM Corp. | (25,672) | (295) |
Webster Financial Corp. | (4,872) | (293) | |
* | OneMain Holdings Inc. | (9,360) | (289) |
FNF Group | (7,710) | (284) | |
Navient Corp. | (21,397) | (284) | |
Prosperity Bancshares | |||
Inc. | (3,948) | (283) | |
* | Brighthouse Financial | ||
Inc. | (5,102) | (259) | |
Bank of the Ozarks | (5,425) | (254) | |
(6,051) | |||
Health Care (-2.1%) | |||
Cigna Corp. | (3,894) | (669) | |
* | Brookdale Senior Living | ||
Inc. | (43,493) | (315) | |
* | DexCom Inc. | (4,246) | (311) |
* | Alexion Pharmaceuticals | ||
Inc. | (2,517) | (296) | |
* | Agios Pharmaceuticals | ||
Inc. | (3,491) | (293) | |
* | Envision Healthcare | ||
Corp. | (7,830) | (291) | |
* | Neurocrine Biosciences | ||
Inc. | (3,587) | (291) | |
* | Seattle Genetics Inc. | (5,471) | (280) |
* | Bio-Rad Laboratories | ||
Inc. Class A | (1,100) | (279) | |
* | Veeva Systems Inc. | ||
Class A | (3,943) | (277) | |
* | Endo International plc | (48,090) | (276) |
* | Vertex Pharmaceuticals | ||
Inc. | (1,794) | (275) | |
Perrigo Co. plc | (3,498) | (273) | |
* | Acadia Healthcare Co. | ||
Inc. | (7,562) | (269) | |
* | Mylan NV | (6,891) | (267) |
* | Regeneron | ||
Pharmaceuticals Inc. | (853) | (259) | |
* | Ionis Pharmaceuticals | ||
Inc. | (5,653) | (243) |
* | athenahealth Inc. | (1,961) | (240) |
* | Mallinckrodt plc | (17,308) | (225) |
* | MEDNAX Inc. | (4,856) | (223) |
* | Exelixis Inc. | (10,169) | (212) |
* | DaVita Inc. | (3,305) | (207) |
* | Alnylam | ||
Pharmaceuticals Inc. | (2,151) | (203) | |
* | Incyte Corp. | (3,148) | (195) |
* | ACADIA | ||
Pharmaceuticals Inc. | (11,933) | (189) | |
* | Align Technology Inc. | (466) | (116) |
(6,974) | |||
Industrials (-1.7%) | |||
United Technologies | |||
Corp. | (9,006) | (1,082) | |
Macquarie | |||
Infrastructure Corp. | (8,049) | (305) | |
* | USG Corp. | (7,443) | (300) |
* | HD Supply Holdings Inc. | (7,381) | (286) |
WW Grainger Inc. | (1,015) | (286) | |
* | XPO Logistics Inc. | (2,919) | (284) |
Timken Co. | (6,569) | (281) | |
Equifax Inc. | (2,502) | (280) | |
* | Gardner Denver | ||
Holdings Inc. | (8,861) | (280) | |
* | WESCO International Inc. | (4,687) | (279) |
MSC Industrial Direct | |||
Co. Inc. Class A | (3,190) | (276) | |
* | Spirit Airlines Inc. | (7,229) | (258) |
Pitney Bowes Inc. | (24,325) | (249) | |
* | United Continental | ||
Holdings Inc. | (3,657) | (247) | |
Acuity Brands Inc. | (2,024) | (242) | |
American Airlines | |||
Group Inc. | (5,501) | (236) | |
Terex Corp. | (6,382) | (233) | |
Arconic Inc. | (10,859) | (193) | |
(5,597) | |||
Information Technology (-3.5%) | |||
Marvell Technology | |||
Group Ltd. | (95,335) | (1,912) | |
KLA-Tencor Corp. | (13,500) | (1,373) | |
* | Lumentum Holdings Inc. | (22,896) | (1,155) |
* | salesforce.com Inc. | (4,834) | (585) |
NetApp Inc. | (4,707) | (313) | |
* | FireEye Inc. | (17,211) | (311) |
* | Palo Alto Networks Inc. | (1,589) | (306) |
* | Manhattan Associates | ||
Inc. | (7,091) | (305) | |
* | Akamai Technologies | ||
Inc. | (4,128) | (296) | |
* | Atlassian Corp. plc | ||
Class A | (5,262) | (295) | |
* | Splunk Inc. | (2,841) | (292) |
16
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | Arista Networks Inc. | (1,089) | (288) |
* | NCR Corp. | (9,289) | (286) |
* | First Solar Inc. | (4,025) | (285) |
* | Twitter Inc. | (9,336) | (283) |
NVIDIA Corp. | (1,219) | (274) | |
* | Autodesk Inc. | (2,175) | (274) |
* | Square Inc. | (5,564) | (263) |
Lam Research Corp. | (1,386) | (257) | |
Applied Materials Inc. | (5,095) | (253) | |
* | ON Semiconductor Corp. | (11,406) | (252) |
* | Micron Technology Inc. | (5,362) | (247) |
Western Digital Corp. | (3,129) | (247) | |
* | Coherent Inc. | (1,419) | (239) |
* | Take-Two Interactive | ||
Software Inc. | (2,381) | (237) | |
Cypress Semiconductor | |||
Corp. | (15,515) | (226) | |
Universal Display Corp. | (2,213) | (195) | |
* | Zillow Group Inc. | ||
Class A | (2,758) | (133) | |
Cognex Corp. | (633) | (29) | |
(11,411) | |||
Materials (-0.7%) | |||
Tahoe Resources Inc. | (60,925) | (306) | |
CF Industries Holdings | |||
Inc. | (7,803) | (303) | |
Mosaic Co. | (11,056) | (298) | |
Chemours Co. | (6,055) | (293) | |
* | Platform Specialty | ||
Products Corp. | (28,847) | (290) | |
* | Alcoa Corp. | (5,659) | (290) |
Freeport-McMoRan Inc. | (15,420) | (235) | |
United States Steel Corp. | (6,858) | (232) | |
(2,247) | |||
Real Estate (-0.3%) | |||
DDR Corp. | (38,496) | (279) | |
Taubman Centers Inc. | (4,949) | (277) | |
CoreCivic Inc. | (13,468) | (272) | |
Spirit Realty Capital Inc. | (29,656) | (239) | |
(1,067) | |||
Telecommunication Services (-0.5%) | |||
AT&T Inc. | (37,359) | (1,222) | |
CenturyLink Inc. | (17,551) | (326) | |
* | Sprint Corp. | (30,414) | (170) |
(1,718) | |||
Utilities (-1.0%) | |||
Dominion Energy Inc. | (26,760) | (1,781) | |
SJW Group | (11,375) | (688) | |
* | Vistra Energy Corp. | (14,111) | (322) |
NRG Energy Inc. | (9,810) | (304) | |
(3,095) | |||
Total Common Stocks Sold Short | |||
(Proceeds $66,884) | (67,264) |
Temporary Cash Investments (27.4%) | |||
Money Market Fund (20.7%) | |||
2 | Vanguard Market | ||
Liquidity Fund, | |||
1.886% | 671,775 | 67,178 | |
Face | |||
Amount | |||
($000) | |||
U. S. Government and Agency Obligations (6.7%) | |||
3 | United States Treasury Bill, | ||
1.391%, 5/3/18 | 3,300 | 3,299 | |
United States Treasury Bill, | |||
1.602%, 5/24/18 | 1,200 | 1,199 | |
3,4 | United States Treasury Bill, | ||
1.482%, 6/7/18 | 6,000 | 5,990 | |
United States Treasury Bill, | |||
1.509%, 6/21/18 | 1,200 | 1,197 | |
4 | United States Treasury Bill, | ||
1.892%, 9/27/18 | 5,700 | 5,655 | |
3,4 | United States Treasury Bill, | ||
1.941%, 9/27/18 | 1,250 | 1,240 | |
4 | United States Treasury Bill, | ||
1.883%, 10/4/18 | 3,000 | 2,975 | |
21,555 | |||
Total Temporary Cash Investments | |||
(Cost $88,729) | 88,733 | ||
4,5,† Other Assets and Liabilities— | |||
Net (31.1%) | 100,997 | ||
Net Assets (100%) | 324,406 |
17
Alternative Strategies Fund
Amount | |
($000) | |
Consolidated Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, | |
Long Positions, at Value | |
Unaffiliated Issuers | 223,495 |
Affiliated Vanguard Funds | 67,178 |
Total Long Positions | 290,673 |
Investment in Vanguard | 18 |
†Cash Segregated for Short Positions | 88,570 |
Receivables for Investment | |
Securities Sold | 3,403 |
Receivables for Accrued Income | 201 |
Variation Margin Receivable— | |
Futures Contracts | 618 |
Unrealized Appreciation— | |
Forward Currency Contracts | 4,852 |
4,5 Other Assets | 9,175 |
Total Assets | 397,510 |
Liabilities | |
Securities Sold Short, at Value | 67,264 |
Payables for Investment Securities | |
Purchased | 2,134 |
Payables to Vanguard | 115 |
Variation Margin Payable— | |
Futures Contracts | 1,689 |
Unrealized Depreciation— | |
Forward Currency Contracts | 1,544 |
Other Liabilities | 358 |
Total Liabilities | 73,104 |
Net Assets | 324,406 |
At April 30, 2018, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 318,427 |
Undistributed Net Investment Income | 271 |
Accumulated Net Realized Losses | (4,750) |
Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions | 8,155 |
Investment Securities Sold Short | (380) |
Futures Contracts | (570) |
Forward Currency Contracts | 3,308 |
Foreign Currencies | (55) |
Net Assets | 324,406 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Long security positions with a value of $2,435,000 and cash
of $88,570,000 are held in a segregated account 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 Security value determined using significant unobservable inputs.
2 Affiliated money market fund available only to Vanguard
funds and certain trusts and accounts managed by Vanguard.
Rate shown is the 7-day yield.
3 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 $12,379,000 and cash of $1,269,000
have been segregated as initial margin for open futures contracts.
5 Cash of $420,000 has been segregated as collateral for open
forwards contracts.
ADR—American Depositary Receipt.
CVR—Contingent Value Rights.
REIT—Real Estate Investment Trust.
18
Alternative Strategies Fund
Derivative Financial Instruments Outstanding as of Period End | ||||
Futures Contracts | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Long Futures Contracts | ||||
2-Year U.S. Treasury Note | June 2018 | 825 | 174,939 | (439) |
5-Year U. S. Treasury Note | June 2018 | 363 | 41,203 | (211) |
10-Year U. S. Treasury Note | June 2018 | 222 | 26,557 | (122) |
MSCI Singapore Index | May 2018 | 308 | 9,569 | 155 |
FTSE MIB Index | June 2018 | 67 | 9,551 | 750 |
CAC 40 Index | May 2018 | 141 | 9,324 | 314 |
IBEX 35 Index | May 2018 | 76 | 9,158 | 198 |
OMX Stockholm 30 Index | May 2018 | 508 | 9,093 | 250 |
Amsterdam Exchange Index | May 2018 | 68 | 9,086 | 155 |
Low Sulphur Gas Oil1 | June 2018 | 76 | 4,944 | 160 |
WTI Crude Oil1 | May 2018 | 72 | 4,937 | 152 |
LME Tin1 | June 2018 | 46 | 4,884 | 31 |
Soybean Meal1 | July 2018 | 124 | 4,883 | 87 |
Cotton No.21 | July 2018 | 115 | 4,820 | 11 |
LME Lead1 | June 2018 | 83 | 4,815 | (42) |
LME Zinc1 | June 2018 | 61 | 4,772 | (22) |
LME Aluminium1 | June 2018 | 83 | 4,700 | (232) |
1,195 |
19
Alternative Strategies Fund
Futures Contracts (continued) | ||||
($000) | ||||
Value and | ||||
Number of | Unrealized | |||
Long (Short) | Notional | Appreciation | ||
Expiration | Contracts | Amount | (Depreciation) | |
Short Futures Contracts | ||||
MSCI Taiwan Index | May 2018 | (240) | (9,444) | (15) |
Hang Seng Index | May 2018 | (48) | (9,377) | (28) |
KOSPI 200 Index | June 2018 | (123) | (9,294) | (76) |
DAX 30 Index | June 2018 | (24) | (9,142) | (495) |
SPI 200 Index | June 2018 | (81) | (9,120) | (286) |
E-mini S&P 500 Index | June 2018 | (68) | (9,000) | (110) |
KC Hard Red Winter Wheat1 | July 2018 | (190) | (5,106) | (215) |
Wheat1 | July 2018 | (198) | (5,054) | (213) |
Coffee1 | July 2018 | (108) | (4,973) | (150) |
Corn1 | July 2018 | (244) | (4,889) | (77) |
Feeder Cattle1 | May 2018 | (68) | (4,766) | 57 |
Soybean Oil1 | July 2018 | (253) | (4,648) | 138 |
Cocoa1 | July 2018 | (164) | (4,663) | (464) |
Sugar #111 | June 2018 | (352) | (4,632) | 169 |
(1,765) | ||||
(570) | ||||
1 Security is owned by the subsidiary. |
Unrealized appreciation (depreciation) on open 2-Year U.S. Treasury Note, 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, DAX 30 Index, and E-mini S&P 500 Index contracts is required to be treated as realized gain (loss) for tax purposes.
20
Alternative Strategies Fund
Forward Currency Contracts | ||||||
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
Bank of America, N.A. | 5/8/18 | CAD | 49,911 | USD | 38,792 | 89 |
Bank of America, N.A. | 5/8/18 | AUD | 49,832 | USD | 38,209 | (693) |
BNP Paribas | 5/8/18 | NOK | 263,702 | USD | 33,615 | (735) |
Bank of America, N.A. | 5/8/18 | NOK | 36,394 | USD | 4,641 | (102) |
Bank of America, N.A. | 5/8/18 | HKD | 10,692 | USD | 1,364 | (1) |
Bank of America, N.A. | 5/8/18 | USD | 50,640 | EUR | 40,980 | 1,124 |
Bank of America, N.A. | 5/8/18 | USD | 38,462 | CHF | 36,604 | 1,500 |
Bank of America, N.A. | 5/8/18 | USD | 38,435 | SEK | 320,120 | 1,853 |
Bank of America, N.A. | 5/8/18 | USD | 8,059 | AUD | 10,505 | 151 |
Bank of America, N.A. | 5/8/18 | USD | 5,631 | CAD | 7,245 | (13) |
Bank of America, N.A. | 5/8/18 | USD | 70 | CAD | 88 | 1 |
BNP Paribas | 5/8/18 | USD | 3,055 | DKK | 18,445 | 64 |
BNP Paribas | 5/8/18 | USD | 2,868 | GBP | 2,040 | 59 |
Bank of America, N.A. | 5/8/18 | USD | 1,364 | HKD | 10,692 | 1 |
BNP Paribas | 5/8/18 | USD | 264 | AUD | 339 | 9 |
Bank of America, N.A. | 5/8/18 | USD | 84 | GBP | 60 | 1 |
3,308 | ||||||
AUD—Australian dollar. | ||||||
CAD—Canadian dollar. | ||||||
CHF—Swiss franc. | ||||||
DKK—Danish krone. | ||||||
EUR—Euro. | ||||||
GBP—British pound. | ||||||
HKD—Hong Kong dollar. | ||||||
NOK—Norwegian krone. | ||||||
SEK—Swedish krona. | ||||||
SGD—Singapore dollar. | ||||||
USD—U.S. dollar. |
Unrealized appreciation (depreciation) on open forward currency contracts, except for Singapore dollar, Hong Kong dollar, and Danish krone contracts, is treated as realized gain (loss) for tax purposes.
At April 30, 2018, the counterparty had deposited in segregated accounts cash with a value of $3,000,000 in connection with open forward currency contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Alternative Strategies Fund
Consolidated Statement of Operations
Six Months Ended | |
April 30, 2018 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 1,260 |
Interest 2 | 734 |
Total Income | 1,994 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 190 |
Management and Administrative | 286 |
Marketing and Distribution | 26 |
Custodian Fees | 36 |
Shareholders’ Reports and Proxy | 1 |
Trustees’ Fees and Expenses | 5 |
Dividend Expense on Securities Sold Short | 405 |
Total Expenses | 949 |
Net Investment Income (Loss) | 1,045 |
Realized Net Gain (Loss) | |
Investment Securities—Long Positions 2 | (610) |
Investment Securities Sold Short | (1) |
Futures Contracts | (2,445) |
Forward Currency Contracts | (1,546) |
Foreign Currencies | 177 |
Realized Net Gain (Loss) | (4,425) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions 2 | (5,671) |
Investment Securities Sold Short | 1,402 |
Futures Contracts | 388 |
Forward Currency Contracts | 3,237 |
Foreign Currencies | (44) |
Change in Unrealized Appreciation (Depreciation) | (688) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (4,068) |
1 Dividends are net of foreign withholding taxes of $11,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the
fund were $525,000, ($14,000), and $4,000, respectively. Purchases and sales are for temporary cash investment purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
22
Alternative Strategies Fund
Consolidated Statement of Changes in Net Assets
Six Months Ended | Year Ended | |
April 30, | October 31, | |
2018 | 2017 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 1,045 | 1,973 |
Realized Net Gain (Loss) | (4,425) | (8,999) |
Change in Unrealized Appreciation (Depreciation) | (688) | 8,023 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (4,068) | 997 |
Distributions | ||
Net Investment Income | (1,498) | (1,072) |
Realized Capital Gain1 | — | (8,751) |
Total Distributions | (1,498) | (9,823) |
Capital Share Transactions | ||
Issued | 45,295 | 70,512 |
Issued in Lieu of Cash Distributions | 1,482 | 9,823 |
Redeemed | (9,052) | (14,643) |
Net Increase (Decrease) from Capital Share Transactions | 37,725 | 65,692 |
Total Increase (Decrease) | 32,159 | 56,866 |
Net Assets | ||
Beginning of Period | 292,247 | 235,381 |
End of Period2 | 324,406 | 292,247 |
1 Includes fiscal 2018 and 2017 short-term gain distributions totaling $0 and $5,983,000, 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 $271,000 and $547,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
23
Alternative Strategies Fund
Consolidated Financial Highlights
Six Months | Aug. 11, | |||
Ended | Year Ended | 20151 to | ||
April 30, | October 31, | Oct. 31, | ||
For a Share Outstanding Throughout Each Period | 2018 | 2017 | 2016 | 2015 |
Net Asset Value, Beginning of Period | $20.46 | $21.28 | $20.23 | $20.00 |
Investment Operations | ||||
Net Investment Income (Loss) | . 068 2 | .1532 | .106 | .004 |
Net Realized and Unrealized Gain (Loss) | ||||
on Investments | (.344) | (.139) | 1.039 | .226 |
Total from Investment Operations | (.276) | .014 | 1.145 | .230 |
Distributions | ||||
Dividends from Net Investment Income | (.104) | (. 093) | (. 095) | — |
Distributions from Realized Capital Gains | — | (.741) | — | — |
Total Distributions | (.104) | (. 834) | (. 095) | — |
Net Asset Value, End of Period | $20.08 | $20.46 | $21.28 | $20.23 |
Total Return3 | -1.35% | 0.11% | 5.68% | 1.15% |
Ratios/Supplemental Data | ||||
Net Assets, End of Period (Millions) | $324 | $292 | $235 | $159 |
Ratio of Total Expenses to Average Net Assets | ||||
Based on Total Expenses4,5 | 0.62% | 0.79% | 0.71% | 0.73%6 |
Net of Dividend and Borrowing Expense | ||||
on Securities Sold Short | 0.36% | 0.35% | 0.36% | 0.36%6 |
Ratio of Net Investment Income (Loss) | ||||
to Average Net Assets | 0.68% | 0.75% | 0.50% | 0.09%6 |
Portfolio Turnover Rate | 150% | 125% | 120% | 25% |
The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable account service fees.
4 Includes dividend expense on securities sold short of 0.26%, 0.44%, 0.35%, and 0.34%, respectively.
5 Includes borrowing expense on securities sold short of 0.00%, 0.00%, 0.00%, and 0.03%, respectively.
6 Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
24
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, 2018, the fund held $17,308,000 in the subsidiary, representing 5% 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 | 18,633 |
Total Liabilities | (1,325) |
Net Assets | 17,308 |
Net Investment Income (Loss) | 6 |
Realized Net Gain (Loss) | 908 |
Change in Unrealized Appreciation (Depreciation) | (1,177) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (263) |
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 are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations
25
Alternative Strategies Fund
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 fund also uses interest rate 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 fund uses global equity index futures contracts to capture excess return opportunities. The primary risk associated with the use of futures contracts are imperfect correlation between changes in market values of the underlying securities or commodities and the prices of futures contracts, and the possibility of an illiquid market. In addition, commodity futures trading is volatile, and even a small movement in market prices could cause large losses. Counter-party 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 notional amounts of the contracts are not recorded in the Consolidated Statement of Net Assets. 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, 2018, the fund’s average investments in long and short futures contracts represented 101% and 16% 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. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets 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 Net Assets. The value of collateral received or pledged
26
Alternative Strategies Fund
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, 2018, the fund’s average investment in forward currency contracts represented 9% 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, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. 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 generally 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 all open federal income tax years (October 31, 2015–2017), and for the period ended April 30, 2018, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
27
Alternative Strategies Fund
7. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
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, 2018, 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, 2018, the fund had contributed to Vanguard capital in the amount of $18,000, 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). Any investments valued with significant unobservable inputs are noted
on the Consolidated Statement of Net Assets.
28
Alternative Strategies Fund
The following table summarizes the market value of the fund’s investments as of April 30, 2018, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—Long Positions | 178,442 | 23,441 | 57 |
Common Stocks Sold Short | (67,264) | — | — |
Temporary Cash Investments | 67,178 | 21,555 | — |
Futures Contracts—Assets1 | 618 | — | — |
Futures Contracts—Liabilities1 | (1,689) | — | — |
Forward Currency Contracts—Assets | — | 4,852 | — |
Forward Currency Contracts—Liabilities | — | (1,544) | — |
Total | 177,285 | 48,304 | 57 |
1 Represents variation margin on the last day of the reporting period. |
D. At April 30, 2018, the fair values of derivatives were reflected in the Consolidated Statement of Assets and Liabilities as follows:
Foreign | |||||
Equity | Commodity | Interest Rate | Exchange | ||
Statement of Assets and | Contracts | Contracts | Contracts | Contracts | Total |
Liabilities Caption | ($000) | ($000) | ($000) | ($000) | ($000) |
Variation Margin Receivable— | |||||
Futures Contracts | 259 | 226 | 133 | — | 618 |
Unrealized Appreciation— | |||||
Forward Currency Contracts | — | — | — | 4,852 | 4,852 |
Total Assets | 259 | 226 | 133 | 4,852 | 5,470 |
Variation Margin Payable— | |||||
Futures Contracts | (360) | (1,316) | (13) | — | (1,689) |
Unrealized Depreciation— | |||||
Forward Currency Contracts | — | — | — | (1,544) | (1,544) |
Total Liabilities | (360) | (1,316) | (13) | (1,544) | (3,233) |
29
Alternative Strategies Fund
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the six months ended April 30, 2018, were:
Foreign | |||||
Equity | Commodity | Interest Rate | Exchange | ||
Realized Net Gain (Loss) | Contracts | Contracts | Contracts | Contracts | Total |
on Derivatives | ($000) | ($000) | ($000) | ($000) | ($000) |
Futures Contracts | 1,822 | 910 | (5,177) | — | (2,445) |
Forward Currency Contracts | — | — | — | (1,546) | (1,546) |
Realized Net Gain (Loss) | |||||
on Derivatives | 1,822 | 910 | (5,177) | (1,546) | (3,991) |
Change in Unrealized Appreciation (Depreciation) on Derivatives | |||||
Futures Contracts | 923 | (1,177) | 642 | — | 388 |
Forward Currency Contracts | — | — | — | 3,237 | 3,237 |
Change in Unrealized Appreciation | |||||
(Depreciation) on Derivatives | 923 | (1,177) | 642 | 3,237 | 3,625 |
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 | Exposure3 | ||
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. | 4,720 | (809) | 3,911 | — | 3,000 | 911 |
BNP Paribas | 132 | (735) | (603) | 420 | — | — |
Exchange—Traded Index | ||||||
Futures Contracts | 259 | (360) | (101) | 7,040 | — | — |
Exchange—Traded Commodity | ||||||
Futures Contracts | 226 | (1,316) | (1,090) | 5,733 | — | — |
Exchange—Traded Interest | ||||||
Rate Futures Contracts | 133 | (13) | 120 | 875 | — | — |
Total | 5,470 | (3,233) | 2,237 | 14,068 | 3,000 | 911 |
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 may not
exchange collateral if amount is below a specified minimum transfer amount.
30
Alternative Strategies Fund
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 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.
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, 2017, the fund had available capital losses totaling $1,448,000 that may be carried forward indefinitely to offset future capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2018; should the fund realize net capital losses for the year, the losses will be added to the loss carry-forward balance above.
At April 30, 2018, the cost of long security positions for tax purposes was $282,560,000. Net unrealized appreciation of long security positions for tax purposes was $8,113,000, consisting of unrealized gains of $13,264,000 on securities that had risen in value since their purchase and $5,151,000 in unrealized losses on securities that had fallen in value since their purchase. Tax-basis net unrealized depreciation on securities sold short was $380,000, consisting of unrealized gains of $5,822,000 on securities that had fallen in value since their purchase and $6,202,000 in unrealized losses on securities that had risen in value since their purchase.
F. During six months ended April 30, 2018, the fund purchased $193,866,000 of investment securities and sold $142,023,000 of investment securities, other than temporary cash investments. The proceeds of short sales and the cost of purchases to cover short sales were $53,058,000 and $49,669,000, respectively.
G. Capital shares issued and redeemed were:
Six Months Ended | Year Ended | |
April 30, 2018 | October 31, 2017 | |
Shares | Shares | |
(000) | (000) | |
Issued | 2,250 | 3,467 |
Issued in Lieu of Cash Distributions | 74 | 484 |
Redeemed | (454) | (728) |
Net Increase (Decrease) in Shares Outstanding | 1,870 | 3,223 |
At April 30, 2018 Vanguard Managed Payout Fund was the record or beneficial owner of 81% of the fund’s net assets.
H. Management has determined that no material events or transactions occurred subsequent to April 30, 2018, that would require recognition or disclosure in these financial statements.
31
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.
32
Six Months Ended April 30, 2018 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Alternative Strategies Fund | 10/31/2017 | 4/30/2018 | Period |
Based on Actual Fund Return | $1,000.00 | $986.51 | $3.04 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,021.73 | 3.10 |
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 0.62%. 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 (181/365).
33
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 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. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also 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 to the fund since its 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 compared with a relevant 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.
34
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 expenses were 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.
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 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.
35
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.
36
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark
of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use
by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification
makes any express or implied warranties or representations with respect to such standard or classification (or the results
to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification.
Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in
making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
37
This page intentionally left blank.
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 208 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustees1
F. William McNabb III
Born in 1957. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: chairman of the board (January 2010–present) of Vanguard and of each of the investment companies served by Vanguard, trustee (2009–present) of each of the investment companies served by Vanguard, and director (2008–present) of Vanguard. Chief executive officer and president (2008–2017) of Vanguard and each of the investment companies served by Vanguard, managing director (1995–2008) of Vanguard, and director (1997–2018) of Vanguard Marketing Corporation. Director (2018–present) of UnitedHealth Group.
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (January 2018–present) of Vanguard; chief executive officer, president, and trustee (January 2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (February 2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) of the Children’s Hospital of Philadelphia.
Independent Trustees
Emerson U. Fullwood
Born in 1948. Trustee since January 2008. Principal occupation(s) during the past five years and other experience: executive chief staff and marketing officer for North America and corporate vice president (retired 2008) of Xerox Corporation (document management products and services). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Lead director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) of the University of Pennsylvania. Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and professor of communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania. Trustee of the National Constitution Center.
1 Mr. McNabb and Mr. Buckley are considered “interested persons,” as defined in the Investment Company Act of 1940, because they are officers of the Vanguard funds.
JoAnn Heffernan Heisen
Born in 1950. Trustee since July 1998. Principal occupation(s) during the past five years and other experience: corporate vice president of Johnson & Johnson (pharmaceuticals/medical devices/consumer products) and member of its executive committee (1997–2008). Chief global diversity officer (retired 2008), vice president and chief information officer (1997–2006), controller (1995–1997), treasurer (1991–1995), and assistant treasurer (1989–1991) of Johnson & Johnson. Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation. Member of the advisory board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education. Director of the V Foundation for Cancer Research. Member of the advisory council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 1953. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: senior vice president and chief financial officer (retired 2013) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Chairman of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors), the board of advisors for Spruceview Capital Partners, and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: president (2010–present) and chief executive officer (2011–present) of The Guardian Life Insurance Company of America. Chief operating officer (2010–2011) and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, the Partnership for New York City (business leadership), and the Committee Encouraging Corporate Philanthropy. Trustee of the Economic Club of New York and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 1952. Trustee since December 2004. Principal occupation(s) during the past five years and other experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011). Chief investment officer and co-managing partner of HighVista Strategies LLC (private investment firm). Overseer of the Museum of Fine Arts Boston.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director of i(x) Investments, LLC.
Peter F. Volanakis
Born in 1955. Trustee since July 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2010) of Corning Incorporated (communications equipment) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the Board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard and global head of Fund Administration at Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG LLP (audit, tax, and advisory services).
Brian Dvorak
Born in 1973. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2017–present) of Vanguard and each of the investment companies served by Vanguard. Assistant vice president (2017–present) of Vanguard Marketing Corporation. Vice president and director of Enterprise Risk Management (2011–2013) at Oppenheimer Funds, Inc.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2008–present) and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Director and senior vice president (2016–2018) of Vanguard Marketing Corporation. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
Vanguard Senior Management Team | |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Chris D. McIsaac | |
Chairman Emeritus and Senior Advisor | |
John J. Brennan | |
Chairman, 1996–2009 | |
Chief Executive Officer and President, 1996–2008 | |
Founder | |
John C. Bogle | |
Chairman and Chief Executive Officer, 1974–1996 |
P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
Connect with Vanguard® > vanguard.com | |
Fund Information > 800-662-7447 | Source for Bloomberg Barclays indexes: Bloomberg |
Direct Investor Account Services > 800-662-2739 | Index Services Limited. Copyright 2018, Bloomberg. All |
rights reserved. | |
Institutional Investor Services > 800-523-1036 | |
CFA® is a registered trademark owned by CFA Institute. | |
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. | |
© 2018 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q12982 062018 |
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: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not Applicable.
Item 13: 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/ MORTIMER J. BUCKLEY* |
MORTIMER J. BUCKLEY | |
CHIEF EXECUTIVE OFFICER | |
Date: June 14, 2018 |
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/ MORTIMER J. BUCKLEY* |
MORTIMER J. BUCKLEY | |
CHIEF EXECUTIVE OFFICER | |
Date: June 14, 2018 | |
VANGUARD TRUSTEES’ EQUITY FUND | |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER | |
Date: June 14, 2018 |
* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on January 18, 2018; see file Number
33-32216, Incorporated by Reference.