UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

 

Semiannual Report | June 30, 2016

Vanguard Balanced Index Fund

 

Vanguard’s Principles for Investing Success

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

Goals. Create clear, appropriate investment goals.

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

Discipline. Maintain perspective and long-term discipline.

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

We believe there is no wiser course for any investor.

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the
sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows
us to help millions of clients around the world reach their financial goals.

 

Your Fund’s Total Returns

For a benchmark description, see the Glossary.
Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Institutional Shares are
available to certain institutional investors who meet specific administrative, service, and account-size criteria.

 

 

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Chairman’s Letter

Dear Shareholder,

U.S. stocks overcame several hurdles en route to gains over the six months ended June 30, 2016. Generally speaking, value stocks outperformed growth stocks and small-capitalization stocks bested larger-caps. U.S. bonds produced impressive results. Lower-rated investment-grade bonds did better than their higher-rated counterparts, and longer-term bonds surpassed those with shorter maturities.

Investor Shares of Vanguard Balanced Index Fund returned 4.52%. The fund tightly tracked the performance of its target benchmark, the Balanced Composite Index, and significantly outpaced the average return of its peers.

The fund’s stock portion accounts for about 60% of the portfolio’s assets. It tracks the performance of the entire U.S. stock market as represented by the CRSP US Total Market Index, which returned 3.66%. The fund’s bond portion makes up most of the rest of the portfolio. It tracks the broad U.S. taxable bond market as represented by the Barclays U.S. Aggregate Float Adjusted Index, which returned 5.52%.

As of June 30, the fund’s 30-day SEC yield for Investor Shares was 1.85%, down from 1.96% on December 31, 2015. Yields for the other share classes were somewhat higher, a result of their lower costs.

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Stocks waxed and waned through periods of turbulence

Toward the end of the half year, global stock markets dropped sharply then rose after the momentous decision by United Kingdom voters to leave the European Union. The markets already were jittery before the June 23 “Brexit” vote. But volatility spiked afterward, as investors digested the significant global economic implications and the likelihood of extended uncertainty while the separation is carried out.

The broad U.S. stock market returned roughly 4% for the six months. U.S. stocks plunged on news of the referendum’s outcome but quickly reversed. Worries about Brexit’s effect on trade and global economic growth seemed to diminish as expectations increased that major central banks would be responsive to any fallout.

International stocks had a rougher time, returning about –1%. European stocks in particular suffered as the lead-up to the Brexit referendum and subsequent uncertainty hit closer to home. Developed Pacific markets also retreated. Emerging-market stocks were a bright spot, returning nearly 8%.

Bonds rolled to strong returns as investors weighed options

The broad U.S. bond market returned 5.31% as investors sought safe-haven assets amid questionable global economic growth, low inflation, and stock market volatility. Exceptionally low or negative

 

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yields abroad attracted foreign investors to U.S. Treasury debt. The yield of the 10-year U.S. Treasury note closed at 1.47% at the end of June, down from 2.30% at the end of December. (Bond prices and yields move in opposite directions.)

The Federal Reserve has held its target for short-term interest rates steady since raising it by a quarter of a percentage point in December. During the period, the 0.25%–0.5% rate remained historically low and continued to curb returns for money market funds and savings accounts.

International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 11.94%. Counter to recent trends, a number of foreign currencies strengthened against the dollar, but returns were solid even without this currency benefit.

Utilities and telecommunications produced impressive results

The equity portion of the Balanced Index Fund reflects the returns of the broad U.S. equity market. It offers wide exposure to growth and value stocks; large-, mid-, and small-capitalization stocks; and all ten industry sectors.

For the most recent six months, seven of the index’s ten market sectors produced positive results. Three of them—oil and gas, telecommunications, and utilities—posted double-digit returns.

The fund expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the
six months ended June 30, 2016, the fund’s annualized expense ratios were 0.21% for Investor Shares, 0.08% for Admiral Shares, and 0.07%
for Institutional Shares. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures
information through year-end 2015.

Peer group: Mixed-Asset Target Allocation Growth Funds.

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Utilities and telecommunications, two of the fund’s smallest-weighted sectors, topped the field with returns of about 24% each. Firms in both industries deliver stable and steady dividend yields. These tend to be attractive to investors seeking income at a time when bond yields are historically low and stock volatility is high.

Industrial, oil and gas, and consumer goods stocks also significantly boosted the fund’s returns. Gains were evident across most of the industrial sector; conglomerates, building materials, transportation, machinery, and defense firms all made solid contributions. As oil and commodity prices have bounced back over the past few months, so have the energy sector’s integrated oil and gas companies and exploration and production firms. Food, household product, and tobacco companies were among the leaders in consumer goods.

The four largest sector weightings were also the fund’s weakest. Consumer services was essentially flat, while technology, health care, and financials each declined about 1%. Airlines lagged in consumer services, and internet and software companies detracted in technology. Lower long-term interest rates have hurt banks, asset managers, consumer finance companies, and investment firms in the financial sector. Biotechnology companies dragged down the health care sector.

Longer-dated bonds were the top performers

The fixed income portion of your fund provides broad exposure to the U.S. bond market. It invests in U.S. Treasury and agency bonds, government mortgage-backed securities, and investment-grade corporate bonds of all maturities (short-, intermediate-, and long-term).

The U.S. Treasury yield curve flattened over the six months. For example, the 2-year Treasury yield slid 49 basis points to 0.58%, and the 10-year Treasury yield fell 83 basis points to 1.47%, a level not seen since 2012. That translated into greater price increases for Treasuries further out on the maturity spectrum. Short- and intermediate-term Treasuries saw some price appreciation but returned less than 4% over the period. Long-term Treasuries, however, returned more than 15%; the bulk of that came from a rise in prices.

Government mortgage-backed securities didn’t fare as well. Their return of just under 3% may have been due in part to the fact that there aren’t as many long-dated maturities in this segment. Concerns about prepayment risk may have played a role as well while interest rates were falling.

Investment-grade corporate bonds returned close to 8%. Utilities and industrial bonds were top performers. Many companies in the energy and metals

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and mining segments were hard hit by the drop in commodity prices after 2014. But demand for their bonds picked up when prices started moving in the other direction in February. The financial sector, on the other hand, returned less than 5%. Bonds issued by banks were particularly out of favor because lower interest rates tend to weigh on profitability.

A dose of discipline is crucial when markets become volatile

The heightened volatility in capital markets that surrounded the Brexit vote reminds us that nobody can control the markets’ direction or reliably predict where they’ll go in the short term. However, investors can control how they react to such turbulence.

During periods of market adversity, it’s more important than ever to keep sight of one of Vanguard’s key principles: Maintain perspective and long-term discipline. Whether you’re investing for yourself or on behalf of clients, your success is affected greatly by how you respond—or don’t respond—at these times. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)

As I’ve written in the past, the best course for long-term investors is generally to ignore daily market moves and not make decisions based on emotion. This is also a good time to evaluate your portfolio and make sure your asset allocation is aligned with your time horizon, goals, and risk tolerance.

The markets are unpredictable and often confounding. Keeping your long-term plans clearly in focus can help you weather these periodic storms.

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
July 21, 2016

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Balanced Index Fund

Fund Profile
As of June 30, 2016

 

 

 

 

 

Fund Asset Allocation

 

1 The expense ratios shown are from the prospectus dated April 26, 2016, and represent estimated costs for the current fiscal year. For the six
months ended June 30, 2016, the annualized expense ratios were 0.21% for Investor Shares, 0.08% for Admiral Shares, and 0.07% for Institutional
Shares.

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Balanced Index Fund

 

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

 

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

Equity Investment Focus

 

 

 

 

Fixed Income Investment Focus

 

 

 

 

 

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Average Annual Total Returns: Periods Ended June 30, 2016
				Ten Years
	Inception Date	One Year	Five Years	Income	Capital	Total
Investor Shares	11/9/1992	3.87%	8.48%	2.49%	4.30%	6.79%
Admiral Shares	11/13/2000	4.01	8.63	2.63	4.29	6.92
Institutional Shares	12/1/2000	4.02	8.65	2.66	4.29	6.95

 

Balanced Index Fund

Financial Statements (unaudited)

Statement of Net Assets—Investments Summary
As of June 30, 2016

This Statement summarizes the fund’s holdings by asset type. Details are reported for each of the fund’s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the fund’s net assets. The total value of smaller holdings is reported as a single amount within each category.

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 complete listing of the fund’s holdings is available electronically on vanguard.com and on the Securities and Exchange Commission’s website (sec.gov), or you can have it mailed to you without charge by calling 800-662-7447. For the first and third fiscal quarters, the fund files the lists with the SEC on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website. 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).

 

10

 

 

11

 

 

12

 

 

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• See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Represents the aggregate value, by category, of securities that are not among the 50 largest holdings and, in total for any issuer,
represent 1% or less of net assets.
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 59.9% and 1.5%,
respectively, of net assets.
2 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed
by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth,
in exchange for senior preferred stock.
3 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments
and prepayments or the possibility of the issue being called.
4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of
June 30, 2016.
5 Adjustable-rate security.
6 Certain of the fund’s securities are 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 June 30, 2016, the aggregate value
of these securities was $109,485,000, representing 0.4% of net assets.
7 Securities with a value of $4,097,000 have been segregated as initial margin for open futures contracts.
8 Includes $33,183,000 of collateral received for securities on loan.
9 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown
is the 7-day yield.
10 The total value of securities on loan is $31,616,000.
See accompanying Notes, which are an integral part of the Financial Statements.

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Balanced Index Fund

Statement of Operations

 

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

15

 

Balanced Index Fund

Statement of Changes in Net Assets

 

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

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Balanced Index Fund

Financial Highlights

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 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.
2 Includes 11%, 24%, 27%, 27%, 25%, and 23% attributable to mortgage-dollar-roll activity.

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

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Balanced Index Fund

Financial Highlights

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 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.
2 Includes 11%, 24%, 27%, 27%, 25%, and 23% attributable to mortgage-dollar-roll activity.

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

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Balanced Index Fund

Financial Highlights

The expense ratio, net investment income ratio, and turnover rate for the current period have been annualized.
1 Includes 11%, 24%, 27%, 27%, 25%, and 23% attributable to mortgage-dollar-roll activity.

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

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Balanced Index Fund

Notes to Financial Statements

Vanguard Balanced Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries. The fund offers three classes of shares: Investor Shares, Admiral Shares, and Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares and Institutional Shares are designed for investors who meet certain administrative, service, and account-size criteria.

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

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. 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. Bonds and temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Other temporary cash investments are valued at amortized cost, which approximates market value. 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.

2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. 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.

20

 

Balanced Index Fund

Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

During the six months ended June 30, 2016, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.

3. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may be a seller of TBA transactions to reduce its exposure to the mortgage-backed securities market or in order to sell mortgage-backed securities it owns under delayed-delivery arrangements. When the fund is a buyer of TBA transactions, it maintains cash or short-term investments in an amount sufficient to meet the purchase price at the settlement date of the TBA transaction. The primary risk associated with TBA transactions is that a counterparty may default on its obligations. The fund mitigates its counterparty risk by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring its exposure to each counterparty. The fund may also enter into a Master Securities Forward Transaction Agreement (MSFTA) with certain counterparties and require them to transfer collateral as security for their performance. Under an MSFTA, upon a counterparty default (including bankruptcy), the fund may terminate any TBA transactions with that counterparty, 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.

At June 30, 2016, counterparties had deposited in segregated accounts securities with a value of $274,000 in connection with TBA transactions.

4. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund’s portfolio turnover rate. Amounts to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold or Payables for Investment Securities Purchased in the Statement of Net Assets.

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Balanced Index Fund

5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (December 31, 2012–2015), and for the period ended June 30, 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

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

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

The fund had no borrowings outstanding at June 30, 2016, or at any time during the period then ended.

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

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Balanced Index Fund

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

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

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At June 30, 2016, the fund had contributed to Vanguard capital in the amount of $2,285,000, representing 0.01% of the fund’s net assets and 0.91% 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).

The following table summarizes the market value of the fund’s investments as of June 30, 2016, based on the inputs used to value them:

 

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Balanced Index Fund

D. At June 30, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

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. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

During the six months ended June 30, 2016, the fund realized $49,511,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.

The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at December 31, 2015, the fund had available capital losses totaling $54,369,000 to offset future net capital gains. Of this amount, $15,654,000 is subject to expiration on December 31, 2017. Capital losses of $38,715,000 realized beginning in fiscal 2011 may be carried forward indefinitely under the Regulated Investment Company Modernization Act of 2010, but must be used before any expiring loss carryforwards. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending December 31, 2016; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.

At June 30, 2016, the cost of investment securities for tax purposes was $20,177,279,000. Net unrealized appreciation of investment securities for tax purposes was $8,446,236,000, consisting of unrealized gains of $8,603,203,000 on securities that had risen in value since their purchase and $156,967,000 in unrealized losses on securities that had fallen in value since their purchase.

F. During the six months ended June 30, 2016, the fund purchased $2,967,314,000 of investment securities and sold $2,078,061,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were

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Balanced Index Fund

$5,101,617,000 and $4,884,642,000, respectively. Total purchases and sales include $0 and $83,973,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.

G. Capital share transactions for each class of shares were:

 

H. Management has determined that no material events or transactions occurred subsequent to
June 30, 2016, that would require recognition or disclosure in these financial statements.

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About Your Fund’s Expenses

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

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

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

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

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

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

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

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

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

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The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that
period are 0.21% for Investor Shares, 0.08% for Admiral Shares, and 0.07% for Institutional Shares. The dollar amounts shown as “Expenses
Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in
the most recent six-month period, then divided by the number of days in the most recent 12-month period (182/366).

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Trustees Approve Advisory Arrangement

The board of trustees of Vanguard Balanced Index Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard)—through its Equity Index and Fixed Income Groups. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.

The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.

Nature, extent, and quality of services

The board reviewed the quality of the fund’s investment management services over both the short and long term and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing investments for more than three decades. Both the Equity Index Group and the Fixed Income Group adhere to sound, disciplined investment management processes; each group’s management team has considerable experience, stability, and depth.

The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.

Investment performance

The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance relative to a target 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 expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below its peer-group average. Information about the fund’s 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.

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Glossary

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

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

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

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

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.

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

Dividend Yield. The current, annualized rate of dividends paid on a share of stock, divided by its current share price. For a fund, the weighted average yield for stocks it holds. The index yield is based on the current annualized rate of dividends paid on stocks in the index.

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

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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.

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

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

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

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

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

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Benchmark Information

Balanced Composite Index: Weighted 60% Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) and 40% Lehman Brothers U.S. Aggregate Bond Index through May 31, 2005; 60% MSCI US Broad Market Index and 40% Barclays U.S. Aggregate Bond Index through December 31, 2009; 60% MSCI US Broad Market Index and 40% Barclays U.S. Aggregate Float Adjusted Index through January 14, 2013; and 60% CRSP US Total Market Index and 40% Barclays U.S. Aggregate Float Adjusted Index thereafter.

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The People Who Govern Your Fund

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

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.

 

 

 

1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

 

 

 

Semiannual Report | June 30, 2016

Vanguard Managed Payout 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.

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice.
Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the
risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the
sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows
us to help millions of clients around the world reach their financial goals.

 

Your Fund’s Total Returns

 

For a benchmark description, see the Glossary.
Vanguard owns a pending patent application for its Managed Payout Fund under U.S. Patent Application No. 2009-0076980-A1.

 

The fund pays monthly and other distributions that may include some combination of dividend income, return of capital, and capital gains. The
tax characteristics of these distributions, however, cannot be determined until after the end of the year.

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Chairman’s Letter

Dear Shareholder,

The six-month period ended June 30, 2016, was a challenging one for many investment strategies, especially as stock markets rode a roller coaster. Nonetheless, the balanced holdings of Vanguard Managed Payout Fund helped it return a solid 4.38%, a bit ahead of its composite benchmark index.

As a reminder, the fund’s benchmark consists of three primary asset classes: 60% equities (36% U.S. and 24% international), 35% fixed income (24.5% U.S. and 10.5% currency­hedged international bonds), and 5% commodities. From time to time, the fund’s advisor, Vanguard Quantitative Equity Group, adjusts its investment allocations, although it made no strategic shifts during the period.

The wide range in returns of the fund’s eight underlying Vanguard funds, plus its small stake in commodity­linked investments, helped underscore the benefits of diversification. For example, commodities advanced by double digits, developed international stock markets were about flat, and Vanguard Market Neutral Fund lost ground.

The road was bumpy again for global stock markets

The long­anticipated U.K. referendum on whether to remain in the European Union was the defining event of capital markets during the first half of 2016. Uncertainty before the June 23 “Brexit” vote led

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to increased volatility in stock markets. Stocks then tumbled sharply after the decision to leave before regaining some ground by the end of June. Because the vote has significant global economic implications, and it will take considerable time for details to be worked out, uncertainty is likely to persist.

The broad U.S. stock market returned roughly 4% for the half year. International stocks had a rougher time, returning about –1%. European stocks in particular slumped as the uncertainty before and after the Brexit vote hit closer to home. Developed Pacific markets also retreated. Emerging­market stocks were a bright spot, returning nearly 8%.

Bonds rolled to strong returns as investors weighed options

The broad U.S. bond market returned 5.31% as investors sought safe­haven assets amid concerns about the global growth pace, low inflation, and stock market volatility. Exceptionally low or negative yields abroad attracted foreign investors to the still­positive yields offered by U.S. bonds. The yield of the 10­year U.S. Treasury note closed at 1.47% at the end of June, down from 2.30% at the end of December. (Bond prices and yields move in opposite directions.)

The Federal Reserve has held its target for short­term interest rates steady since raising it a quarter percentage point in December. The still historically low

 

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0.25%–0.5% rate continued to curb returns for money market funds and savings accounts.

International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 11.94% for U.S. investors. Although Britain’s pound sank to multi­decade lows against the dollar after the Brexit vote, some other foreign currencies strengthened during the six months, lifting bond returns when translated into dollars. Even without this currency benefit, international bond results were solid.

In a turnabout, both commodities and emerging-market stocks rose

To meet its investment objective of a 4% target annual distribution rate, Vanguard Managed Payout Fund invests in a well­diversified portfolio that includes traditional Vanguard stock and bond funds, Vanguard funds that seek returns less correlated with the markets, and a small slice of commodities exposure. The six­month results for some of these investments differed dramatically from their performance for all of 2015.

The fund’s commodity­linked investments, which constitute only about 5% of its total assets, are a case in point. In 2015, the Bloomberg Commodity Index returned about –25%. Over the first half of 2016, it advanced about 13%, despite another drop in oil prices early in the year.

Emerging­market stocks displayed a similar pattern. Vanguard Emerging Markets Stock Index Fund returned about –15% in 2015, but a rise approaching 8% made it your fund’s second­best performer so far this year.

Returns of four underlying funds ranged from more than 5% to more than 6%: Vanguard Global Minimum Volatility Fund, Vanguard Total International Bond Index Fund, Vanguard Total Bond Market II Index Fund, and the relatively new Vanguard Alternative Strategies Fund. Vanguard Total Stock Market Index Fund returned more than 3%, while its international counterpart—Vanguard Total International Stock Index Fund—was about break­even. Each of those two broad equity funds constituted about 20% of Managed Payout’s assets at the end of June. Vanguard Market Neutral Fund, after an exceptionally strong performance in 2015, returned about –2% for the six months.

For more on your fund’s positioning and the advisor’s strategy during the period, please see the Advisor’s Report that follows this letter.

A dose of discipline is crucial when markets become volatile

The heightened volatility in capital markets that surrounded the Brexit vote reminds us that nobody can control the direction of the markets or reliably predict where they’ll go in the short term. However, investors can control how they react to unstable and turbulent markets.

During periods of market adversity, it’s more important than ever to keep sight of one of Vanguard’s key principles:

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Maintain perspective and long­term discipline. Whether you’re investing for yourself or on behalf of clients, your success is affected greatly by how you respond—or don’t respond—during turbulent markets. (You can read Vanguard’s Principles for Investing Success at vanguard.com/research.)

As I’ve written in the past, the best course for long­term investors is generally to ignore daily market moves and not make decisions based on emotion. This is also a good time to evaluate your portfolio and make sure your asset allocation is aligned with your time horizon, goals, and risk tolerance. Of course, within the Managed Payout Fund, asset allocation is overseen by our Quantitative Equity Group.

The markets are unpredictable and often confounding. Keeping your long­term plans clearly in focus can help you weather these periodic storms.

Thank you for your confidence in Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
July 20, 2016

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Advisor’s Report

For the six months ended June 30, 2016, Vanguard Managed Payout Fund returned 4.38%, marginally ahead of the 4.03% return of its composite benchmark.

Investment objective

The Managed Payout Fund has two objectives. In any given year, we seek to outperform the benchmark on a risk­adjusted basis. Over the long run, we seek to produce an absolute return that matches the 4% target distribution rate plus inflation. For the three­ and five­year periods through June 2016, the fund met both objectives.

As with any active fund, both objectives are challenging, especially achieving the total return objective over time. The Managed Payout Fund’s return can fluctuate significantly over short periods, because it depends on the performance of the stock and bond markets. We do our best to protect investors from short­term volatility by having a balanced, diversified asset allocation and through our fund selection. At the same time, we always focus on identifying value­added opportunities using qualitative and quantitative tools within a risk­managed approach.

Successes and challenges

Most children enjoy a good roller­coaster ride and the feeling of defying gravity, careening up and down without being much in control. The opposite can be said about investors when it comes to their portfolio. On the one hand, volatility can create investing opportunities, but on the other, it is the enemy of asset accumulation and growth. For example, if your portfolio lost 20%, you’d need a 25% recovery to fully recoup your losses. We should always think about returns cumulatively because the path your portfolio takes determines the future value of your assets.

The first half of 2016 was certainly volatile. It began with a negative outlook on Chinese growth and a strong stock sell­off that persisted into February. The Federal Reserve’s view then shifted to dovish, and interest rate hawkishness was quickly forgotten by the stock market. Then came the June crash over the United Kingdom’s “Brexit” vote, followed by a swift recovery.

Despite the volatility, the broad U.S. market’s return approached 4%, and the three index funds in the long­only equity basket (Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund) all advanced. The actively managed Vanguard Global Minimum Volatility Fund returned more than 6%, well ahead of its benchmark.

Although we matched the total equity weight of the Managed Payout Fund’s composite benchmark, our allocation decisions within equities primarily drove our outperformance. We entered 2016 with a tilt toward emerging markets, based on their attractive valuation. This view was rewarded, as emerging markets outperformed both U.S. and international developed markets—partly because of the depreciating U.S. dollar.

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We maintained about a 15% stake in Vanguard Global Minimum Volatility Fund, out of concern about stock market volatility. That fund can be expected to outperform the overall global market during sharp downturns while lagging in strong bull markets. The Chicago Board Options Exchange Volatility Index (VIX) spiked in January and February amid extremely volatile crude oil prices and concerns about China’s growth pace, and again in June because of Brexit. June started relatively calm with the VIX at 14.2, but then it spiked to nearly 26 before finishing at 15.6. Instability led to strong relative performance by the Global Minimum Volatility Fund compared with the equity composition of the Managed Payout Fund’s benchmark.

Fixed income markets also saw a lot of action. Uncertainty about the economy and stock markets led the Fed to pull back on further tightening, and interest rates reflected this. The U.S. Treasury 10­year yield, which started 2016 at 2.30%, declined to 1.47%.

Geopolitical risk was also reflected in international rates; Brexit was a catalyst that accelerated those yield declines. Central bank policies to combat low inflation and weak growth drove many developed nations’ bonds into record negative nominal yields, including 10­year government bonds in Germany, Japan, and Switzerland. As rates continued to fall, Managed Payout’s underlying bond funds performed well.

We entered the year with a below­benchmark allocation to fixed income, because we did not expect rates to decline further and did not want to tie up our assets in low­carry products. This view held back our first­half results.

However, our underweighting of fixed income allowed us to invest in Vanguard Alternative Strategies Fund, which uses a combination of five alternative strategies that span multiple asset classes: equity, fixed income, currency, and commodity­linked investments. This fund returned more than 5% for the period, beating its benchmark and helping Managed Payout’s return. The alternative premium nature of that underlying investment further diversifies our portfolio to achieve short­and long­term goals.

Over the last several years, Vanguard Market Neutral Fund has provided strong returns, but this period was challenging—especially the second quarter, when it detracted from the Managed Payout Fund’s results.

Commodities, the ugly duckling of 2015, turned into a swan in 2016. They were our best­performing investment, returning more than 13%. We do not have an active view on commodities, but we believe that this category is an important part of our diversified portfolio.

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Positioning

We remain strong believers in the attractive relative valuation of emerging markets and maintain our tilt toward their stocks. We expect the Global Minimum Volatility Fund to continue providing some protection from geopolitical volatility. Amid continued low interest rates, the rate carry on global bonds will remain under pressure for the foreseeable future. Given that we do not anticipate robust fixed income returns, we will continue to hold the Market Neutral and Alternative Strategies Funds, mindful that this exposes us to duration risk (relative to the composite benchmark) if rates move even lower.

Market volatility can destroy value but at the same time create opportunities, which we continually evaluate.

Thank you for entrusting us with your investments.

Portfolio Managers:

John Ameriks, Principal

Anatoly Shtekhman, CFA

Vanguard Quantitative Equity Group

July 21, 2016

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Managed Payout Fund

Fund Profile
As of June 30, 2016

 

 

 

Fund Asset Allocation

1 This figure—drawn from the prospectus dated April 26, 2016—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 Managed Payout Fund invests. For the six months ended
June 30, 2016, the fund’s annualized expense figure totals 0.35%, representing the fund’s own annualized expense ratio of 0.02% together with
acquired fund fees and expenses of 0.33%. (Approximately 37% of the total expenses are attributable to the short-sale dividend and borrowing
expenses reported by Vanguard Market Neutral Fund and Vanguard Alternative Strategies Fund.)

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Average Annual Total Returns: Periods Ended June 30, 2016
				Since Inception
	Inception Date	One Year	Five Years	Income	Capital	Total
Managed Payout Fund	5/2/2008	1.41%	6.16%	3.00%	1.40%	4.40%

 

Managed Payout Fund

Consolidated Financial Statements (unaudited)

Consolidated Statement of Net Assets
As of June 30, 2016

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

 

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