Semiannual Report | June 30, 2022
Vanguard
Tax-Managed Funds®
| Vanguard Tax-Managed Balanced Fund |
| Vanguard Tax-Managed Capital Appreciation Fund |
| Vanguard Tax-Managed Small-Cap Fund |
Contents
About Your Fund's Expenses | 1 |
Tax-Managed Balanced Fund | 3 |
Tax-Managed Capital Appreciation Fund | 62 |
Tax-Managed Small-Cap Fund | 80 |
Trustees Approve Advisory Arrangements | 96 |
Liquidity Risk Management | 97 |
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.
| Six Months Ended June 30, 2022 | |||
| Beginning Account Value 12/31/2021 | Ending Account Value 6/30/2022 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Tax-Managed Balanced Fund | $1,000.00 | $858.20 | $0.41 |
| Tax-Managed Capital Appreciation Fund | |||
| Admiral™ Shares | $1,000.00 | $790.90 | $0.40 |
| Institutional Shares | 1,000.00 | 791.00 | 0.27 |
| Tax-Managed Small-Cap Fund | |||
| Admiral Shares | $1,000.00 | $811.50 | $0.40 |
| Institutional Shares | 1,000.00 | 811.70 | 0.27 |
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| Six Months Ended June 30, 2022 | |||
| Beginning Account Value 12/31/2021 | Ending Account Value 6/30/2022 | Expenses Paid During Period | |
| Based on Hypothetical 5% Yearly Return | |||
| Tax-Managed Balanced Fund | $1,000.00 | $1,024.35 | $0.45 |
| Tax-Managed Capital Appreciation Fund | |||
| Admiral Shares | $1,000.00 | $1,024.35 | $0.45 |
| Institutional Shares | 1,000.00 | 1,024.50 | 0.30 |
| Tax-Managed Small-Cap Fund | |||
| Admiral Shares | $1,000.00 | $1,024.35 | $0.45 |
| Institutional Shares | 1,000.00 | 1,024.50 | 0.30 |
The calculations are
based on expenses incurred in the most recent six-month period. The funds' annualized six-month expense ratios for that period are: for the Tax-Managed Balanced Fund, 0.09%; for the Tax-Managed Capital Appreciation
Fund, 0.09% for Admiral Shares and 0.06% for Institutional Shares; and for the Tax-Managed Small-Cap Fund, 0.09% for Admiral Shares and 0.06% 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 (181/365).
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Fund Allocation
As of June 30, 2022
| Investment Exposure | |
| Basic Materials | 0.8% |
| Consumer Discretionary | 6.5 |
| Consumer Staples | 2.8 |
| Energy | 2.0 |
| Financials | 5.1 |
| Health Care | 6.6 |
| Industrials | 6.0 |
| Real Estate | 1.5 |
| Technology | 12.3 |
| Telecommunications | 1.3 |
| Utilities | 1.7 |
| Tax-Exempt Municipal Bonds | 53.4 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Industry Classification Benchmark (“ICB”), except for the “Other” category (if applicable),
which includes securities that have not been provided an ICB classification as of the effective reporting period.
The Industry
Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept any liability to any person for any loss or damage arising out of any error or omission in the ICB.
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Tax-Managed Balanced Fund
Financial Statements (unaudited)
Schedule of Investments
As of June 30, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
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Derivative Financial
Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number of Long (Short) Contracts | Notional Amount | Value and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | September 2022 | 363 | 68,779 | 590 |
| Short Futures Contracts | ||||
| Ultra 10-Year U.S. Treasury Note | September 2022 | (100) | (12,737) | 209 |
| 799 | ||||
See accompanying
Notes, which are an integral part of the Financial Statements.
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Tax-Managed Balanced Fund
Statement of Assets and Liabilities
As of June 30, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value—Unaffiliated Issuers (Cost $5,951,135) | 7,588,897 |
| Investment in Vanguard | 289 |
| Cash | 31,025 |
| Cash Collateral Pledged—Futures Contracts | 3,816 |
| Receivables for Investment Securities Sold | 6 |
| Receivables for Accrued Income | 47,751 |
| Receivables for Capital Shares Issued | 2,465 |
| Total Assets | 7,674,249 |
| Liabilities | |
| Payables for Investment Securities Purchased | 62,396 |
| Payables for Capital Shares Redeemed | 3,019 |
| Payables to Vanguard | 281 |
| Variation Margin Payable—Futures Contracts | 709 |
| Total Liabilities | 66,405 |
| Net Assets | 7,607,844 |
At June 30, 2022, net assets consisted of: | |
| Paid-in Capital | 6,097,702 |
| Total Distributable Earnings (Loss) | 1,510,142 |
| Net Assets | 7,607,844 |
| Net Assets | |
| Applicable to 210,707,918 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 7,607,844 |
| Net Asset Value Per Share | $36.11 |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Tax-Managed Balanced Fund
Statement of Operations
| Six Months Ended June 30, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1,2 | 25,443 |
| Interest | 44,393 |
| Total Income | 69,836 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 86 |
| Management and Administrative | 3,392 |
| Marketing and Distribution | 163 |
| Custodian Fees | 7 |
| Shareholders’ Reports | 35 |
| Trustees’ Fees and Expenses | 2 |
| Other Expenses | 8 |
| Total Expenses | 3,693 |
| Net Investment Income | 66,143 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold1,3 | (53,408) |
| Futures Contracts | (3,087) |
| Realized Net Gain (Loss) | (56,495) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities1 | (1,279,383) |
| Futures Contracts | (973) |
| Change in Unrealized Appreciation (Depreciation) | (1,280,356) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,270,708) |
| 1 | Dividend income, realized net gain (loss), and change in unrealized appreciation (depreciation) from affiliated company of the fund were $122,000, ($1,356,000), and ($1,198,000), respectively. Purchases and sales were $43,498,000 and $96,900,000, respectively. |
| 2 | Dividends are net of foreign withholding taxes of $6,000. |
| 3 | Includes $415,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Statement of Changes in Net Assets
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 66,143 | 120,069 | |
| Realized Net Gain (Loss) | (56,495) | 56,006 | |
| Change in Unrealized Appreciation (Depreciation) | (1,280,356) | 776,797 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,270,708) | 952,872 | |
| Distributions | |||
| Total Distributions | (67,608) | (114,715) | |
| Capital Share Transactions | |||
| Issued | 698,512 | 1,671,876 | |
| Issued in Lieu of Cash Distributions | 55,259 | 94,308 | |
| Redeemed | (623,274) | (647,530) | |
| Net Increase (Decrease) from Capital Share Transactions | 130,497 | 1,118,654 | |
| Total Increase (Decrease) | (1,207,819) | 1,956,811 | |
| Net Assets | |||
| Beginning of Period | 8,815,663 | 6,858,852 | |
| End of Period | 7,607,844 | 8,815,663 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Financial Highlights
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2022 | Year Ended December 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $42.43 | $38.06 | $34.25 | $29.65 | $30.73 | $27.85 |
| Investment Operations | ||||||
| Net Investment Income1 | .313 | .620 | .658 | .701 | .688 | .622 |
| Net Realized and Unrealized Gain (Loss) on Investments | (6.313) | 4.335 | 3.808 | 4.603 | (1.110) | 2.871 |
| Total from Investment Operations | (6.000) | 4.955 | 4.466 | 5.304 | (.422) | 3.493 |
| Distributions | ||||||
| Dividends from Net Investment Income2 | (.320) | (.585) | (.656) | (.704) | (.658) | (.613) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.320) | (.585) | (.656) | (.704) | (.658) | (.613) |
| Net Asset Value, End of Period | $36.11 | $42.43 | $38.06 | $34.25 | $29.65 | $30.73 |
| Total Return3 | -14.18% | 13.10% | 13.30% | 18.01% | -1.43% | 12.64% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $7,608 | $8,816 | $6,859 | $5,809 | $4,370 | $3,930 |
| Ratio of Total Expenses to Average Net Assets | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% |
| Ratio of Net Investment Income to Average Net Assets | 1.62% | 1.53% | 1.90% | 2.16% | 2.22% | 2.11% |
| Portfolio Turnover Rate4 | 10% | 6% | 20% | 12% | 11% | 9% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | The tax character of distributions is determined at fiscal year-end. Tax-exempt dividends represent 63%, 62%, 61%, 61%, and 61% of dividends from net investment income for the years ended December 31, 2021, 2020, 2019, 2018, and 2017, respectively. |
| 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 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares. |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Notes to Financial Statements
Vanguard Tax-Managed Balanced
Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in debt instruments of many municipal issuers; the issuers’ abilities to meet their
obligations may be affected by economic and political developments in a specific state or region. Many municipalities insure repayment of their bonds. The insurance does not guarantee the market value of the municipal
bonds.
Significant market
disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia's invasion of Ukraine), acts of terrorism, or other events, can adversely affect local
and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund performance.
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 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. 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 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 also 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 bonds or stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk
involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors
the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s
performance and requires daily settlement of variation margin representing changes in the market value of each contract. Any securities pledged as initial margin for open contracts are noted in the Schedule of
Investments.
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 gains (losses) on futures
contracts.
During the six months ended
June 30, 2022, the fund’s average investments in long and short futures contracts represented 1% and less than 1% of net assets, respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
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5. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based
upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended June
30, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income is accrued daily. Premiums and discounts on debt
securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call
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 and 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 June 30, 2022, the fund had contributed to Vanguard capital in the amount of $289,000, representing less than 0.01% of the fund’s net
assets and 0.12% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. Various inputs may be used to determine the value of the fund’s investments and derivatives. 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 and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
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The following table summarizes
the market value of the fund's investments and derivatives as of June 30, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 3,538,179 | — | — | 3,538,179 |
| Tax-Exempt Municipal Bonds | — | 4,050,718 | — | 4,050,718 |
| Total | 3,538,179 | 4,050,718 | — | 7,588,897 |
| Derivative Financial Instruments | ||||
| Assets | ||||
| Futures Contracts1 | 799 | — | — | 799 |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
D. As of June 30, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 5,950,430 |
| Gross Unrealized Appreciation | 1,917,525 |
| Gross Unrealized Depreciation | (278,259) |
| Net Unrealized Appreciation (Depreciation) | 1,639,266 |
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, 2021, the fund had available capital losses totaling $70,573,000 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 December 31, 2022; should the fund realize net capital losses for
the year, the losses will be added to the loss carryforward balance above.
E. During the six months ended June 30, 2022, the fund purchased $1,232,615,000 of investment securities and sold $827,971,000 of investment securities, other than temporary cash
investments. Purchases and sales include $0 and $2,989,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
The fund purchased securities
from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended June 30, 2022, such purchases were $120,361,000 and sales were $255,909,000, resulting in net realized gain of $45,000; these amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities noted above.
F. Capital shares issued and redeemed were:
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||
| Shares (000) | Shares (000) | ||
| Issued | 17,626 | 41,347 | |
| Issued in Lieu of Cash Distributions | 1,454 | 2,319 | |
| Redeemed | (16,150) | (16,078) | |
| Net Increase (Decrease) in Shares Outstanding | 2,930 | 27,588 |
G. Management has determined that no events or transactions occurred subsequent to June 30, 2022, that would require recognition or disclosure in these financial statements.
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Fund Allocation
As of June 30, 2022
| Basic Materials | 2.0% |
| Consumer Discretionary | 14.1 |
| Consumer Staples | 5.8 |
| Energy | 4.4 |
| Financials | 11.1 |
| Health Care | 13.9 |
| Industrials | 12.8 |
| Real Estate | 3.5 |
| Technology | 26.5 |
| Telecommunications | 2.7 |
| Utilities | 3.2 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Industry Classification Benchmark (“ICB”), except for the “Other” category (if applicable),
which includes securities that have not been provided an ICB classification as of the effective reporting period.
The Industry
Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept any liability to any person for any loss or damage arising out of any error or omission in the ICB.
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Financial Statements (unaudited)
Schedule of Investments
As of June 30, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
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Derivative Financial
Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number of Long (Short) Contracts | Notional Amount | Value and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | September 2022 | 146 | 27,663 | (94) |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Statement of Assets and Liabilities
As of June 30, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $5,680,456) | 14,616,360 |
| Affiliated Issuers (Cost $16,843) | 16,844 |
| Total Investments in Securities | 14,633,204 |
| Investment in Vanguard | 574 |
| Cash | 2 |
| Cash Collateral Pledged—Futures Contracts | 1,542 |
| Receivables for Accrued Income | 9,882 |
| Receivables for Capital Shares Issued | 4,099 |
| Total Assets | 14,649,303 |
| Liabilities | |
| Payables for Investment Securities Purchased | 89 |
| Payables for Capital Shares Redeemed | 3,727 |
| Payables to Vanguard | 517 |
| Variation Margin Payable—Futures Contracts | 232 |
| Total Liabilities | 4,565 |
| Net Assets | 14,644,738 |
At June 30, 2022, net assets consisted of: | |
| Paid-in Capital | 6,151,570 |
| Total Distributable Earnings (Loss) | 8,493,168 |
| Net Assets | 14,644,738 |
| Admiral Shares—Net Assets | |
| Applicable to 64,655,796 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 12,595,878 |
| Net Asset Value Per Share—Admiral Shares | $194.81 |
| Institutional Shares—Net Assets | |
| Applicable to 21,168,374 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 2,048,860 |
| Net Asset Value Per Share—Institutional Shares | $96.79 |
See accompanying
Notes, which are an integral part of the Financial Statements.
72
Tax-Managed Capital Appreciation Fund
Statement of Operations
| Six Months Ended June 30, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 110,415 |
| Interest2 | 198 |
| Total Income | 110,613 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 697 |
| Management and Administrative—Admiral Shares | 5,491 |
| Management and Administrative—Institutional Shares | 567 |
| Marketing and Distribution—Admiral Shares | 230 |
| Marketing and Distribution—Institutional Shares | 22 |
| Custodian Fees | 7 |
| Shareholders’ Reports—Admiral Shares | 32 |
| Shareholders’ Reports—Institutional Shares | — |
| Trustees’ Fees and Expenses | 4 |
| Other Expenses | 8 |
| Total Expenses | 7,058 |
| Net Investment Income | 103,555 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | (171,375) |
| Futures Contracts | (10,627) |
| Realized Net Gain (Loss) | (182,002) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (3,783,877) |
| Futures Contracts | (1,841) |
| Change in Unrealized Appreciation (Depreciation) | (3,785,718) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (3,864,165) |
| 1 | Dividends are net of foreign withholding taxes of $28,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $198,000, ($34,000), and $8,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $3,491,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying
Notes, which are an integral part of the Financial Statements.
73
Tax-Managed Capital Appreciation Fund
Statement of Changes in Net Assets
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 103,555 | 186,559 | |
| Realized Net Gain (Loss) | (182,002) | 439,211 | |
| Change in Unrealized Appreciation (Depreciation) | (3,785,718) | 3,238,336 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (3,864,165) | 3,864,106 | |
| Distributions | |||
| Admiral Shares | (89,142) | (165,377) | |
| Institutional Shares | (14,859) | (24,347) | |
| Total Distributions | (104,001) | (189,724) | |
| Capital Share Transactions | |||
| Admiral Shares | 161,194 | 80,691 | |
| Institutional Shares | 56,183 | 470,623 | |
| Net Increase (Decrease) from Capital Share Transactions | 217,377 | 551,314 | |
| Total Increase (Decrease) | (3,750,789) | 4,225,696 | |
| Net Assets | |||
| Beginning of Period | 18,395,527 | 14,169,831 | |
| End of Period | 14,644,738 | 18,395,527 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Tax-Managed Capital Appreciation Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2022 | Year Ended December 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $247.92 | $197.63 | $165.93 | $128.29 | $137.30 | $114.08 |
| Investment Operations | ||||||
| Net Investment Income1 | 1.382 | 2.542 | 2.666 | 2.557 | 2.385 | 2.166 |
| Net Realized and Unrealized Gain (Loss) on Investments | (53.107) | 50.328 | 31.640 | 37.603 | (9.045) | 23.211 |
| Total from Investment Operations | (51.725) | 52.870 | 34.306 | 40.160 | (6.660) | 25.377 |
| Distributions | ||||||
| Dividends from Net Investment Income | (1.385) | (2.580) | (2.606) | (2.520) | (2.350) | (2.157) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (1.385) | (2.580) | (2.606) | (2.520) | (2.350) | (2.157) |
| Net Asset Value, End of Period | $194.81 | $247.92 | $197.63 | $165.93 | $128.29 | $137.30 |
| Total Return2 | -20.91% | 26.87% | 21.07% | 31.46% | -4.97% | 22.40% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $12,596 | $15,850 | $12,543 | $10,579 | $7,951 | $8,143 |
| Ratio of Total Expenses to Average Net Assets | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% |
| Ratio of Net Investment Income to Average Net Assets | 1.27% | 1.13% | 1.60% | 1.70% | 1.69% | 1.73% |
| Portfolio Turnover Rate3 | 1% | 0% | 6% | 5% | 6% | 7% |
| The expense ratio and net investment income ratio 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 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares. |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Tax-Managed Capital Appreciation Fund
Financial Highlights
| Institutional Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2022 | Year Ended December 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $123.18 | $98.19 | $82.46 | $63.75 | $68.23 | $56.69 |
| Investment Operations | ||||||
| Net Investment Income1 | .703 | 1.304 | 1.360 | 1.292 | 1.207 | 1.099 |
| Net Realized and Unrealized Gain (Loss) on Investments | (26.388) | 25.002 | 15.690 | 18.693 | (4.499) | 11.531 |
| Total from Investment Operations | (25.685) | 26.306 | 17.050 | 19.985 | (3.292) | 12.630 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.705) | (1.316) | (1.320) | (1.275) | (1.188) | (1.090) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.705) | (1.316) | (1.320) | (1.275) | (1.188) | (1.090) |
| Net Asset Value, End of Period | $96.79 | $123.18 | $98.19 | $82.46 | $63.75 | $68.23 |
| Total Return | -20.90% | 26.91% | 21.08% | 31.51% | -4.95% | 22.43% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $2,049 | $2,546 | $1,627 | $1,223 | $952 | $1,006 |
| Ratio of Total Expenses to Average Net Assets | 0.06% | 0.06% | 0.06% | 0.06% | 0.06% | 0.06% |
| Ratio of Net Investment Income to Average Net Assets | 1.30% | 1.17% | 1.63% | 1.73% | 1.72% | 1.76% |
| Portfolio Turnover Rate2 | 1% | 0% | 6% | 5% | 6% | 7% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares. |
See accompanying
Notes, which are an integral part of the Financial Statements.
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Tax-Managed Capital Appreciation Fund
Notes to Financial Statements
Vanguard Tax-Managed Capital
Appreciation Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Admiral Shares and Institutional Shares. Each of the
share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
Significant market
disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia's invasion of Ukraine), acts of terrorism, or other events, can adversely affect local
and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund performance.
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.
2. Futures Contracts:
The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a
desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between
changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is
the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and
has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities pledged as initial margin for open contracts are noted in the Schedule of Investments.
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 gains (losses) on futures
contracts.
During the six months ended
June 30, 2022, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end
during the period.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
5. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual
77
Tax-Managed Capital Appreciation Fund
commitment fee of 0.10% of the undrawn
committed amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight
Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended June
30, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold.
Each class of shares has equal
rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) 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 and 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 June 30, 2022, the fund had contributed to Vanguard capital in the amount of $574,000, representing less than 0.01% of the fund’s net
assets and 0.23% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. Various inputs may be used to determine the value of the fund’s investments and derivatives. 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 and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
At June 30, 2022, 100% of the
market value of the fund's investments and derivatives was determined based on Level 1 inputs.
78
Tax-Managed Capital Appreciation Fund
D. As of June 30, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 5,697,426 |
| Gross Unrealized Appreciation | 9,281,952 |
| Gross Unrealized Depreciation | (346,268) |
| Net Unrealized Appreciation (Depreciation) | 8,935,684 |
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, 2021, the fund had available capital losses totaling $260,904,000 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 December 31, 2022; should the fund realize net capital losses for
the year, the losses will be added to the loss carryforward balance above.
E. During the six months ended June 30, 2022, the fund purchased $447,052,000 of investment securities and sold $140,097,000 of investment securities, other than temporary cash
investments. Purchases and sales include $0 and $8,210,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
The fund purchased securities
from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended June 30, 2022, such purchases were $864,000 and sales were $1,103,000, resulting in net realized gain of $70,000; these amounts, other than temporary cash investments, are
included in the purchases and sales of investment securities noted above.
F. Capital share transactions for each class of shares were:
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Admiral Shares | |||||
| Issued | 596,318 | 2,698 | 1,597,362 | 7,167 | |
| Issued in Lieu of Cash Distributions | 60,423 | 284 | 112,437 | 493 | |
| Redeemed | (495,547) | (2,256) | (1,629,108) | (7,197) | |
| Net Increase (Decrease)—Admiral Shares | 161,194 | 726 | 80,691 | 463 | |
| Institutional Shares | |||||
| Issued | 69,849 | 619 | 539,021 | 4,683 | |
| Issued in Lieu of Cash Distributions | 7,201 | 68 | 13,873 | 123 | |
| Redeemed | (20,867) | (187) | (82,271) | (708) | |
| Net Increase (Decrease)—Institutional Shares | 56,183 | 500 | 470,623 | 4,098 | |
G. Management has determined that no events or transactions occurred subsequent to June 30, 2022, that would require recognition or disclosure in these financial statements.
79
Tax-Managed Small-Cap Fund
Fund Allocation
As of June 30, 2022
| Communication Services | 1.9% |
| Consumer Discretionary | 11.5 |
| Consumer Staples | 5.6 |
| Energy | 5.3 |
| Financials | 18.3 |
| Health Care | 12.5 |
| Industrials | 16.2 |
| Information Technology | 13.4 |
| Materials | 5.3 |
| Real Estate | 7.7 |
| Utilities | 2.3 |
The table reflects the fund’s
investments, except for short-term investments and derivatives. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if
applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
80
Tax-Managed Small-Cap Fund
Financial Statements (unaudited)
Schedule of Investments
As of June 30, 2022
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
81
Tax-Managed Small-Cap Fund
82
Tax-Managed Small-Cap Fund
83
Tax-Managed Small-Cap Fund
84
Tax-Managed Small-Cap Fund
85
Tax-Managed Small-Cap Fund
Derivative Financial
Instruments Outstanding as of Period End
| Futures Contracts | ||||
| ($000) | ||||
| Expiration | Number of Long (Short) Contracts | Notional Amount | Value and Unrealized Appreciation (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini Russell 2000 Index | September 2022 | 823 | 70,284 | (74) |
See accompanying
Notes, which are an integral part of the Financial Statements.
86
Tax-Managed Small-Cap Fund
Statement of Assets and Liabilities
As of June 30, 2022
| ($000s, except shares and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value | |
| Unaffiliated Issuers (Cost $5,522,768) | 7,721,784 |
| Affiliated Issuers (Cost $66,755) | 66,757 |
| Total Investments in Securities | 7,788,541 |
| Investment in Vanguard | 302 |
| Cash Collateral Pledged—Futures Contracts | 1,505 |
| Receivables for Accrued Income | 8,615 |
| Receivables for Capital Shares Issued | 66,875 |
| Total Assets | 7,865,838 |
| Liabilities | |
| Payables for Investment Securities Purchased | 70,431 |
| Payables for Capital Shares Redeemed | 8,883 |
| Payables to Vanguard | 274 |
| Variation Margin Payable—Futures Contracts | 97 |
| Total Liabilities | 79,685 |
| Net Assets | 7,786,153 |
At June 30, 2022, net assets consisted of: | |
| Paid-in Capital | 6,196,497 |
| Total Distributable Earnings (Loss) | 1,589,656 |
| Net Assets | 7,786,153 |
| Admiral Shares—Net Assets | |
| Applicable to 94,019,829 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 7,075,851 |
| Net Asset Value Per Share—Admiral Shares | $75.26 |
| Institutional Shares—Net Assets | |
| Applicable to 9,416,858 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 710,302 |
| Net Asset Value Per Share—Institutional Shares | $75.43 |
See accompanying
Notes, which are an integral part of the Financial Statements.
87
Tax-Managed Small-Cap Fund
Statement of Operations
| Six Months Ended June 30, 2022 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 51,443 |
| Interest2 | 66 |
| Total Income | 51,509 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 596 |
| Management and Administrative—Admiral Shares | 2,753 |
| Management and Administrative—Institutional Shares | 172 |
| Marketing and Distribution—Admiral Shares | 159 |
| Marketing and Distribution—Institutional Shares | 9 |
| Custodian Fees | 9 |
| Shareholders’ Reports—Admiral Shares | 34 |
| Shareholders’ Reports—Institutional Shares | 2 |
| Trustees’ Fees and Expenses | 2 |
| Other Expenses | 8 |
| Total Expenses | 3,744 |
| Expenses Paid Indirectly | (2) |
| Net Expenses | 3,742 |
| Net Investment Income | 47,767 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2,3 | 170,684 |
| Futures Contracts | (7,718) |
| Realized Net Gain (Loss) | 162,966 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities2 | (2,000,315) |
| Futures Contracts | (162) |
| Change in Unrealized Appreciation (Depreciation) | (2,000,477) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,789,744) |
| 1 | Dividends are net of foreign withholding taxes of $3,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $66,000, ($8,000), and $2,000, respectively. Purchases and sales are for temporary cash investment purposes. |
| 3 | Includes $178,672,000 of net gain (loss) resulting from in-kind redemptions. |
See accompanying
Notes, which are an integral part of the Financial Statements.
88
Tax-Managed Small-Cap Fund
Statement of Changes in Net Assets
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 47,767 | 110,132 | |
| Realized Net Gain (Loss) | 162,966 | 677,702 | |
| Change in Unrealized Appreciation (Depreciation) | (2,000,477) | 1,211,025 | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | (1,789,744) | 1,998,859 | |
| Distributions | |||
| Admiral Shares | (44,182) | (99,967) | |
| Institutional Shares | (4,649) | (10,011) | |
| Total Distributions | (48,831) | (109,978) | |
| Capital Share Transactions | |||
| Admiral Shares | 112,857 | 216,002 | |
| Institutional Shares | (8,300) | 80,506 | |
| Net Increase (Decrease) from Capital Share Transactions | 104,557 | 296,508 | |
| Total Increase (Decrease) | (1,734,018) | 2,185,389 | |
| Net Assets | |||
| Beginning of Period | 9,520,171 | 7,334,782 | |
| End of Period | 7,786,153 | 9,520,171 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
89
Tax-Managed Small-Cap Fund
Financial Highlights
| Admiral Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2022 | Year Ended December 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $93.29 | $74.30 | $67.84 | $55.70 | $61.63 | $55.16 |
| Investment Operations | ||||||
| Net Investment Income1 | .466 | 1.090 | .819 | .772 | .737 | .666 |
| Net Realized and Unrealized Gain (Loss) on Investments | (18.019) | 18.985 | 6.451 | 12.146 | (5.965) | 6.486 |
| Total from Investment Operations | (17.553) | 20.075 | 7.270 | 12.918 | (5.228) | 7.152 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.477) | (1.085) | (.810) | (.778) | (.702) | (.664) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Return of Capital | — | — | — | — | — | (.018) |
| Total Distributions | (.477) | (1.085) | (.810) | (.778) | (.702) | (.682) |
| Net Asset Value, End of Period | $75.26 | $93.29 | $74.30 | $67.84 | $55.70 | $61.63 |
| Total Return2 | -18.85% | 27.08% | 11.05% | 23.28% | -8.62% | 13.05% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $7,076 | $8,631 | $6,689 | $6,506 | $5,304 | $5,428 |
| Ratio of Total Expenses to Average Net Assets | 0.09%3 | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% |
| Ratio of Net Investment Income to Average Net Assets | 1.19% | 1.22% | 1.39% | 1.23% | 1.13% | 1.17% |
| Portfolio Turnover Rate4 | 5% | 9% | 31% | 53% | 29% | 37% |
| The expense ratio and net investment income ratio 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 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.09%. |
| 4 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares. |
See accompanying
Notes, which are an integral part of the Financial Statements.
90
Tax-Managed Small-Cap Fund
Financial Highlights
| Institutional Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2022 | Year Ended December 31, | ||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| Net Asset Value, Beginning of Period | $93.50 | $74.47 | $67.99 | $55.83 | $61.77 | $55.29 |
| Investment Operations | ||||||
| Net Investment Income1 | .479 | 1.126 | .844 | .794 | .755 | .693 |
| Net Realized and Unrealized Gain (Loss) on Investments | (18.058) | 19.019 | 6.466 | 12.164 | (5.972) | 6.488 |
| Total from Investment Operations | (17.579) | 20.145 | 7.310 | 12.958 | (5.217) | 7.181 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.491) | (1.115) | (.830) | (.798) | (.723) | (.683) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Return of Capital | — | — | — | — | — | (.018) |
| Total Distributions | (.491) | (1.115) | (.830) | (.798) | (.723) | (.701) |
| Net Asset Value, End of Period | $75.43 | $93.50 | $74.47 | $67.99 | $55.83 | $61.77 |
| Total Return | -18.83% | 27.11% | 11.10% | 23.30% | -8.59% | 13.08% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $710 | $889 | $646 | $593 | $473 | $492 |
| Ratio of Total Expenses to Average Net Assets | 0.06%2 | 0.06% | 0.06% | 0.06% | 0.06% | 0.06% |
| Ratio of Net Investment Income to Average Net Assets | 1.22% | 1.26% | 1.42% | 1.26% | 1.16% | 1.20% |
| Portfolio Turnover Rate3 | 5% | 9% | 31% | 53% | 29% | 37% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.06%. |
| 3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares. |
See accompanying
Notes, which are an integral part of the Financial Statements.
91
Tax-Managed Small-Cap Fund
Notes to Financial Statements
Vanguard Tax-Managed Small-Cap
Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Admiral Shares and Institutional Shares. Each of the share classes
has different eligibility and minimum purchase requirements, and is designed for different types of investors.
Significant market
disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia's invasion of Ukraine), acts of terrorism, or other events, can adversely affect local
and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund's investments and fund performance.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in
preparing its financial statements.
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities’ primary markets, are valued by
methods deemed by the board of trustees to represent fair value. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value. Temporary cash investments are valued using the latest bid
prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Futures Contracts:
The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a
desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between
changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is
the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and
has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin
representing changes in the market value of each contract. Any securities pledged as initial margin for open contracts are noted in the Schedule of Investments.
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 gains (losses) on futures
contracts.
During the six months ended
June 30, 2022, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the
period.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until expiration
of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state income tax
years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
5. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.4 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes
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Tax-Managed Small-Cap Fund
and are subject to the fund’s
regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn committed
amount of the facility, which 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 either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate, the overnight bank funding rate, or the Daily Simple Secured Overnight
Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended June
30, 2022, the fund did not utilize the credit facilities or the Interfund Lending Program.
6. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call 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.
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 and 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 June 30, 2022, the fund had contributed to Vanguard capital in the amount of $302,000, representing less than 0.01% of the fund’s net
assets and 0.12% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. 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 six months ended June 30,
2022, custodian fee offset arrangements reduced the fund’s expenses by $2,000 (an annual rate of less than 0.01% of average net assets).
D. Various inputs may be used to determine the value of the fund’s investments and derivatives. 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 and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
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Tax-Managed Small-Cap Fund
The following table summarizes
the market value of the fund's investments and derivatives as of June 30, 2022, based on the inputs used to value them:
| Level 1 ($000) | Level 2 ($000) | Level 3 ($000) | Total ($000) | |
| Investments | ||||
| Assets | ||||
| Common Stocks | 7,721,784 | — | — | 7,721,784 |
| Temporary Cash Investments | 66,757 | — | — | 66,757 |
| Total | 7,788,541 | — | — | 7,788,541 |
| Derivative Financial Instruments | ||||
| Liabilities | ||||
| Futures Contracts1 | 74 | — | — | 74 |
| 1 | Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
E. As of June 30, 2022, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
| Amount ($000) | |
| Tax Cost | 5,598,005 |
| Gross Unrealized Appreciation | 2,733,611 |
| Gross Unrealized Depreciation | (543,149) |
| Net Unrealized Appreciation (Depreciation) | 2,190,462 |
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, 2021, the fund had available capital losses totaling $764,498,000 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 December 31, 2022; should the fund realize net capital losses for
the year, the losses will be added to the loss carryforward balance above.
F. During the six months ended June 30, 2022, the fund purchased $716,358,000 of investment securities and sold $654,036,000 of investment securities, other than temporary cash
investments. Purchases and sales include $0 and $236,440,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
The fund purchased securities
from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended June 30, 2022, such purchases were $24,353,000 and sales were $13,213,000, resulting in net realized loss of $2,565,000; these amounts, other than temporary cash
investments, are included in the purchases and sales of investment securities noted above.
G. Capital share transactions for each class of shares were:
| Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Admiral Shares | |||||
| Issued | 637,627 | 7,624 | 1,514,849 | 17,250 | |
| Issued in Lieu of Cash Distributions | 30,829 | 384 | 70,145 | 778 | |
| Redeemed | (555,599) | (6,507) | (1,368,992) | (15,531) | |
| Net Increase (Decrease)—Admiral Shares | 112,857 | 1,501 | 216,002 | 2,497 | |
| Institutional Shares | |||||
| Issued | 14,793 | 175 | 140,767 | 1,520 | |
| Issued in Lieu of Cash Distributions | 2,562 | 32 | 6,056 | 67 | |
| Redeemed | (25,655) | (303) | (66,317) | (745) | |
| Net Increase (Decrease)—Institutional Shares | (8,300) | (96) | 80,506 | 842 | |
94
Tax-Managed Small-Cap Fund
H. Management has determined that no events or transactions occurred subsequent to June 30, 2022, that would require recognition or disclosure in these financial statements.
95
Trustees Approve Advisory Arrangements
The board of trustees of Vanguard Tax-Managed
Balanced 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 of trustees of Vanguard Tax-Managed
Capital Appreciation Fund and Vanguard Tax-Managed Small-Cap Fund has also renewed each fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Equity Index Group. The board
determined that continuing each fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decisions
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 periodic reports throughout the year, which included information about the portfolio’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
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 decisions.
Nature, extent, and quality of
services
The board reviewed the quality of each
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 four 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 each advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of each 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 each advisory
arrangement should continue.
Cost
The board concluded that each fund’s
expense ratio was below the average expense ratio charged by funds in its peer group and that each fund’s advisory expenses were also below the peer-group average.
The board does not conduct a
profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of
scale
The board concluded that each fund’s
arrangement with Vanguard ensures that the funds will realize economies of scale as they grow, with the cost to shareholders declining as fund assets increase.
The board will consider
whether to renew the advisory arrangements again after a one-year period.
96
Liquidity Risk Management
Vanguard funds (except for the
money market funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that
each fund adopt a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining
investors’ interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Tax-Managed Funds approved the appointment of liquidity risk management program administrators responsible for administering the Program for Vanguard Tax-Managed Balanced Fund, Vanguard Tax-Managed Capital
Appreciation Fund, and Vanguard Tax-Managed Small-Cap Fund, and for carrying out the specific responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the
Program's operation, its adequacy, and the effectiveness of its implementation for the past year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the
period from January 1, 2021, through December 31, 2021 (the “Review Period”). The Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to
manage the funds' liquidity risk.
97
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