VEA Vanguard FTSE Developed Markets

Item 1: Reports to Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 cover of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Total Returns

 

 

Fiscal Year Ended December 31, 2007
	Ticker	Total
	Symbol	Returns
Vanguard Tax-Managed Balanced Fund	VTMFX	5.1%
Tax-Managed Balanced Composite Index 1		5.6
Average Mixed-Asset Target Moderate Fund 2		5.3
Vanguard Tax-Managed Growth and Income Fund
Investor Shares	VTGIX	5.4%
Admiral™ Shares 3	VTGLX	5.5
Institutional Shares 4	VTMIX	5.5
S&P 500 Index		5.5
Average Large-Cap Core Fund 2		5.7
Vanguard Tax-Managed Capital Appreciation Fund
Investor Shares	VMCAX	6.1%
Admiral Shares	VTCLX	6.1
Institutional Shares	VTCIX	6.1
Russell 1000 Index		5.8
Average Multi-Cap Core Fund 2		6.4
Vanguard Tax-Managed Small-Cap Fund
Investor Shares	VTMSX	0.5%
Institutional Shares	VTSIX	0.5
S&P SmallCap 600 Index		–0.3
Average Small-Cap Core Fund 2		–1.0
Vanguard Tax-Managed International Fund
Investor Shares	VTMGX	11.2%
Institutional Shares	VTMNX	11.2
Vanguard Europe Pacific ETF 5	VEA
Market Price		–2.2 6
Net Asset Value		–2.0 6
MSCI EAFE Index		11.2
Average International Fund 2		12.4

 

 

 

 

1 50% Russell 1000 Index, 50% Lehman Brothers 7 Year Municipal Bond Index.

2 Derived from data provided by Lipper Inc.

3 A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund.

4 This class of shares also carries low expenses and is available for a minimum investment of $5 million.

5 Vanguard Europe Pacific ETF is a share class of Vanguard Tax-Managed International Fund. These Vanguard ETF Shares are traded on the American Stock Exchange and are available only through brokers. The table shows ETF returns based on both the AMEX market price and the net asset value for a share. U.S. Pat. No. 6,879,964 B2.

6 Since inception: July 20, 2007.

 

 

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Chairman’s Letter

 

Dear Shareholder,

Stocks posted positive returns for the fifth straight year, although returns were generally modest as worries about a slowing economy made investors more pessimistic in the latter half of the year. A weaker dollar helped boost international stocks, while bond prices rose as interest rates declined. The returns of the Vanguard Tax-Managed Funds ranged from 0.5% for the Investor Shares of the Tax-Managed Small-Cap Fund to 11.2% for the Investor Shares of the Tax-Managed International Fund.

The funds met their tax-management objectives, as they have since their inceptions. From the Performance at a Glance table on page 8, you can see that the funds’ managers, Vanguard’s Quantitative Equity and Fixed Income Groups, continued to avoid distributing capital gains even after five consecutive years of positive stock performance. The funds’ managers used a variety of portfolio management strategies to avoid realizing capital gains while deviating as little as possible from a pure indexing strategy. Meanwhile, the Tax-Managed International Fund began issuing Vanguard Europe Pacific ETF Shares on July 20.

Stocks traced a jagged path to positive returns

The broad U.S. stock market returned 5.7% in 2007, a fairly tame result that masked a year of ups and downs for equities. The gains in the first half of the year were largely surrendered in

 

 

 

 

 

 

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July and August as the subprime mortgage crisis reverberated beyond housing and financial-related companies, creating fears of a broader economic slowdown. The markets moved higher but remained volatile throughout the rest of the year as investors reacted to mixed economic data, a weakening U.S. dollar, and crude oil prices that surged to nearly $100 per barrel by year-end.

Against this backdrop, many investors sought stability in large-capitalization stocks, which outperformed small-caps for the year; meanwhile, growth stocks outpaced their value-oriented counterparts.

For U.S.-based investors, international stocks posted stronger results than U.S. equities for the sixth consecutive year, with much of the outperformance attributable to the weakness of the U.S. dollar. Emerging markets led the way, followed by developed economies in Europe and the Pacific region.

Risk aversion set the tone in the bond market

During the first half of 2007, the bond market was characterized by tight credit spreads, reflecting investors’ willingness to take on greater levels of risk to earn higher yields. That sentiment changed in the midsummer fallout from the subprime lending crisis. Investors grew wary of risk and showed a preference for higher-quality corporate and government bonds.

 

 

Market Barometer
	Average Annual Total Returns
	Periods Ended December 31, 2007
	One Year	Three Years	Five Years
Stocks
Russell 1000 Index (Large-caps)	5.8%	9.1%	13.4%
Russell 2000 Index (Small-caps)	–1.6	6.8	16.2
Dow Jones Wilshire 5000 Index (Entire market)	5.7	9.2	14.1
MSCI All Country World Index ex USA (International)	17.1	20.4	24.5
Bonds
Lehman U.S. Aggregate Bond Index (Broad taxable market)	7.0%	4.6%	4.4%
Lehman Municipal Bond Index	3.4	3.9	4.3
Citigroup 3-Month Treasury Bill Index	4.7	4.2	2.9
CPI
Consumer Price Index	4.1%	3.3%	3.0%

 

 

 

 

 

 

 

 

 

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This shift drove up prices for high-quality issues, and as the bonds’ prices rose, their yields fell. The yield of the benchmark 10-year Treasury note, for example, fell a full percentage point in the last half of the year (from 5.03% on June 30 to 4.03% at year-end). The Federal Reserve Board lowered its target for the federal funds rate three times in the final four months of 2007, pushing yields even lower on the shorter end of the maturity spectrum.

 

The broad taxable bond market returned 7.0%, outpacing the stock market for the first calendar year since 2002. Tax-exempt municipal bonds returned 3.4%.

Large-cap stocks reemerged while growth outperformed value

After several years when smaller companies and value stocks were market leaders, positions were reversed in 2007 as larger companies, particularly growth

 

 

Expense Ratios 1
Your fund compared with its peer group
	Expense
Tax-Managed Fund	Ratio
Balanced	0.12%
Average Mixed-Asset Target Moderate Fund	1.09
Growth and Income
Investor Shares	0.15%
Admiral Shares	0.09
Institutional Shares	0.07
Average Large-Cap Core Fund	1.35
Capital Appreciation
Investor Shares	0.15%
Admiral Shares	0.09
Institutional Shares	0.07
Average Multi-Cap Core Fund	1.30
Small-Cap
Investor Shares	0.13%
Institutional Shares	0.09
Average Small-Cap Core Fund	1.50
International
Investor Shares	0.15%
Institutional Shares	0.09
Europe Pacific ETF	0.12 2
Average International Fund	1.57

 

 

 

 

 

 

1 Fund expense ratios reflect the 12 months ended December 31, 2007. Peer-group expense ratios are derived from data provided by Lipper Inc. and capture information through year-end 2006.

2 Annualized.

 

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stocks, regained the spotlight. This switch in market leadership was reflected in the returns for the three Vanguard tax-managed funds that invest exclusively in U.S. stocks. The Tax-Managed Capital Appreciation and Growth and Income Funds focus on larger companies, and their total returns were close, at 6.1% and 5.4% (Investor Shares) respectively.

In fact, the Capital Appreciation Fund’s return slightly exceeded that of its target index, the Russell 1000 Index, because the fund favors stocks with lower yields in an effort to reduce dividend distributions. This strategy helped the fund’s relative performance because these stocks outperformed higher-yielding stocks, which tend to be categorized as value stocks.

The Capital Appreciation and Growth and Income Funds both saw gains in eight of ten industry sectors, led by energy and information technology. The two funds’ energy stocks soared 34% for the year on strong performances from large oil and gas companies, which benefited from rising crude oil prices. The funds’ information technology holdings advanced 16% as companies such as Apple Computer capitalized on solid global economic growth and new product releases. The consumer staples and industrial sectors also contributed to the funds’ gains for the period.

The second half of 2007 saw some significant setbacks

However, when clouds darkened during the second half of 2007, two sectors suffered sharp losses, pulling both the Capital Appreciation and Growth and Income Funds back somewhat from their smart first-half gains. The downturn in the U.S. housing market, increasing global inflationary pressures, and the mortgage and credit market crises sent financial markets into turmoil. Financial stocks, including banks and brokerage firms, dropped nearly –19% by year-end.

Consumer discretionary, the second-weakest sector in 2007, returned approximately –13% for the year as media firms, homebuilders, and retailers of household and specialty products were expected to be particularly affected by a slowing economy.

The Small-Cap Fund barely managed any gain as smaller companies stalled. The fund benefitted from its tax management strategy of harvesting losses. Not only did the strategy ensure no distribution of capital gains, but it slightly enhanced the return as the fund marginally outperformed its benchmark.

As was the case with large-cap stocks, financial firms (–24%) and consumer discretionary stocks (–23%) in the small-cap arena were a significant drag on the Small-Cap Fund’s returns. On the plus side, a strong export market helped small-cap industrials (+11%). Small-cap health care companies (+21%) and small-cap energy firms (+24%) did even better.

International stocks again bested the U.S. market

In international markets, the Tax-Managed International Fund’s 11.2% advance for Investor Shares reflected continued economic growth across Europe and Asia. The exception was Japan, where the economy treaded water and stocks

 

 

 

 

 

 

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drifted downward. U.S. investors also continued to benefit from the dollar’s decline against most major currencies, which helps returns when gains are translated into U.S. dollars. For the year, the dollar (as measured by the U.S. Dollar Index) was down about 9% against a basket of other currencies. The fund’s Europe Pacific ETF shares, issued on July 20, finished the remainder of the year in negative territory as international stocks retreated 2.1% because of worries that a U.S. slowdown would affect other countries’ economies.

 

The Tax-Managed Balanced Fund produced a 5.1% return consistent with, if a bit below, the combined return of the large-cap stock and municipal bond indexes that it follows in nearly equal proportions.

A successful strategy and low costs have built a solid long-term record

From the table below, you can see that each of the Tax-Managed Funds has outperformed the average return for peer funds within its category over longer periods. This success can be attributed to the skill of the funds’ investment advisors.

 

 

Total Returns
Ten Years Ended December 31, 2007 1
	Average
	Annual Return
Tax-Managed Balanced Fund	6.1%
Tax-Managed Balanced Composite Index 2	5.9
Average Mixed-Asset Target Moderate Fund 3	5.3
Tax-Managed Growth and Income Fund Investor Shares	5.9%
S&P 500 Index	5.9
Average Large-Cap Core Fund 3	4.6
Tax-Managed Capital Appreciation Fund Investor Shares	6.7%
Russell 1000 Index	6.2
Average Multi-Cap Core Fund 3	6.1
Tax-Managed Small-Cap Fund Investor Shares	12.1%
S&P SmallCap 600 Index	11.9
Average Small-Cap Core Fund 3	11.8
Tax-Managed International Fund Investor Shares	7.3%
MSCI EAFE Index	7.3
Average International Fund 3	7.0

 

The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.

 

 

 

1 Annualized returns are since inception for the Tax-Managed Small-Cap Fund (March 25, 1999) and the Tax-Managed International Fund (August 17, 1999).

2 50% Russell 1000 Index, 50% Lehman Brothers 7 Year Municipal Bond Index.

3 Derived from data provided by Lipper Inc.

 

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The funds also enjoy the advantage of costs that are far below industry averages, which helps them closely track their target indexes.

The table reflects only pre-tax returns. The funds’ performance advantage is greater on an after-tax basis because, unlike many competitors’ offerings, the funds have not generated taxable capital gains distributions to shareholders. Capital gains distributions are subject to taxes when they are held in taxable accounts. We’re pleased that investors in our Tax-Managed Funds have never had to pay capital gains taxes if they have simply held their investments; they have been exposed to such taxes only when redeeming appreciated shares. By managing each fund’s holdings with an eye on the tax consequences, our fund managers hope to continue this enviable tax-efficient performance for years to come.

The funds protect the interests of their long-term investors

All five funds have enjoyed positive returns for the past five years, which might tempt some investors—particularly those with a short-range outlook—to expect similar returns in the future. However, history tells us that investors in stocks and bonds should not be surprised when they experience occasional annual declines as well as gains.

 

To discourage short-term investing, which increases the funds’ investment expenses and might make it more difficult for them to operate tax-efficiently, the Tax-Managed Funds charge a 1% fee on redemptions of shares that have been held less than five years. The fee is paid directly to the funds to the benefit of remaining shareholders.

We trust that you appreciate our longstanding commitment to serve your long-term interests. We also hope you have experienced the rewards of the investment philosophy Vanguard has consistently advocated—to remain broadly diversified, minimize trading activity, and favor funds that are cost-efficient. Each of the Tax-Managed Funds follows this philosophy and can play a valuable role in helping you reach your long-range goals.

 

Thank you for your confidence in Vanguard.

 

Sincerely,

 

 

John J. Brennan

Chairman and Chief Executive Officer

January 18, 2008

 

 

 

 

 

 

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Your Fund’s Performance at a Glance
December 31, 2006–December 31, 2007
			Distributions Per Share
	Starting	Ending	Income	Capital
Tax-Managed Fund	Share Price	Share Price	Dividends	Gains
Balanced	$20.02	$20.45	$0.588	$0.000
Growth and Income
Investor Shares	$30.87	$31.96	$0.577	$0.000
Admiral Shares	63.44	65.69	1.225	0.000
Institutional Shares	30.87	31.96	0.603	0.000
Capital Appreciation
Investor Shares	$33.62	$35.13	$0.533	$0.000
Admiral Shares	67.68	70.70	1.119	0.000
Institutional Shares	33.63	35.13	0.564	0.000
Small-Cap
Investor Shares	$25.72	$25.62	$0.232	$0.000
Institutional Shares	25.77	25.66	0.244	0.000
International
Investor Shares	$14.16	$15.40	$0.336	$0.000
Institutional Shares	14.17	15.41	0.345	0.000
Europe Pacific ETF	49.99 1	47.92	1.055	0.000

 

 

Vanguard Europe Pacific ETF
Premium/Discount: July 20, 2007–December 31, 2007
	Market Price Above or		Market Price Below
	Equal to Net Asset Value			Net Asset Value
	Number	Percentage	Number	Percentage
Basis Point Differential 2	of Days	of Total Days	of Days	of Total Days
0–24.9	52	45.60%	5	4.39%
25–49.9	48	42.11	0	0.00
50–74.9	8	7.02	0	0.00
75–100.0	0	0.00	0	0.00
>100.0	1	0.88	0	0.00
Total	109	95.61%	5	4.39%

 

 

 

 

 

 

 

1 At inception: July 20, 2007.

2 One basis point equals 1/100 of a percentage point.

 

 

8

Tax-Managed Balanced Fund

 

Fund Profile

As of December 31, 2007

 

Total Fund Characteristics
Yield	2.6%
Turnover Rate	10.0%
Expense Ratio	0.12%
Short-Term Reserves	0.0%

 

 

Total Fund Volatility Measures 1
	Fund Versus	Fund Versus
	Composite Index 2	Broad Index 3
R-Squared	0.99	0.89
Beta	1.01	0.45

 

 

Equity Characteristics
		Comparative	Broad
	Fund	Index 4	Index 3
Number of Stocks	641	999	4,843
Median Market Cap	$39.0B	$43.3B	$37.7B
Price/Earnings Ratio	17.4x	17.3x	17.8x
Price/Book Ratio	2.8x	2.8x	2.7x
Dividend Yield	1.6%	1.9%	1.8%
Return on Equity	19.9%	19.9%	19.2%
Earnings Growth Rate	21.4%	21.1%	20.7%
Foreign Holdings	0.1%	0.0%	0.0%

 

 

 

Equity Investment Focus

 

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Ten Largest Stocks 5 (% of equity exposure)
ExxonMobil Corp.	integrated oil and gas	3.5%
General Electric Co.	industrial conglomerate	2.4
Microsoft Corp.	systems software	2.0
AT&T Inc.	integrated telecommunication services	1.6
The Procter & Gamble Co.	household products	1.6
Johnson & Johnson	pharmaceuticals	1.3
Chevron Corp.	integrated oil and gas	1.2
Apple Inc.	computer hardware	1.2
Bank of America Corp.	diversified financial services	1.2
Cisco Systems, Inc.	communications equipment	1.1
Top Ten		17.1%
Top Ten as % of Total Net Assets		7.9%

 

 

Fund Asset Allocation

 

 

 

1 For an explanation of R-squared , beta , and other terms used here, see the Glossary on pages 64–65.

2 50% Russell 1000 Index, 50% Lehman 7 Year Municipal Bond Index.

3 Dow Jones Wilshire 5000 Index.

4 Russell 1000 Index.

5 “Ten Largest Stocks” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

10

Tax-Managed Balanced Fund

 

Fixed Income Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Bonds	145	4,215	42,395
Yield to Maturity	3.7% 3	3.6%	4.0%
Average Coupon	5.0%	5.0%	5.0%
Average Effective Maturity	6.6 years	6.9 years	13.3 years
Average Quality	AA+	AAA	AA+
Average Duration	5.2 years	5.2 years	7.3 years

 

Distribution by Credit Quality (% of fixed income portfolio)
AAA	73.4%
AA	21.9
A	3.1
BBB	1.6

 

Distribution by Maturity (% of fixed income portfolio)
Under 1 Year	9.6%
1–5 Years	32.2
5–10 Years	42.5
10–20 Years	15.7

 

Fixed Income Investment Focus

 

 

 

Largest State Concentrations 4 (% of fixed income portfolio)
New York	10.7%
Ohio	9.0
Texas	8.8
Massachusetts	7.0
Arizona	5.4
California	4.7
Florida	4.5
Maryland	4.1
Pennsylvania	3.7
Michigan	3.3
Top Ten	61.2%

 

1 Lehman 7 Year Municipal Bond Index.

2 Lehman Municipal Bond Index.

3 Before expenses.

4 “Largest State Concentrations” figures exclude any fixed income futures contracts.

 

11

Tax-Managed Balanced Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: December 31, 1997–December 31, 2007

Initial Investment of $10,000

 

 

 

	Average Annual Total Returns			Final Value
	Periods Ended December 31, 2007			of a $10,000
	One Year	Five Years	Ten Years	Investment
Tax-Managed Balanced Fund 1	5.11%	8.55%	6.15%	$18,155
Fee-Adjusted Returns 2	4.09	8.55	6.15	18,155
Russell 1000 Index	5.77	13.43	6.20	18,243
Lehman 7 Year Municipal Bond Index	5.06	3.86	4.96	16,231
Tax-Managed Balanced Composite Index 3	5.56	8.67	5.92	17,779
Average Mixed-Asset Target Moderate Fund 4	5.34	9.51	5.31	16,773

 

Fiscal-Year Total Returns (%): December 31, 1997–December 31, 2007

 

 

 

1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years, but not of the account service fee that may be applicable to certain accounts with balances below $10,000.

3 50% Russell 1000 Index, 50% Lehman 7 Year Municipal Bond Index.

4 Derived from data provided by Lipper Inc.

Note: See Financial Highlights table on page 14 for dividend and capital gains information.

 

 

12

Tax-Managed Balanced Fund

 

Financial Statements

 

The Statement of Net Assets —an integral part of the Financial Statements for Vanguard Tax-Managed Balanced Fund—is included as an insert to this report.

 

Statement of Operations

 

	Year Ended
	December 31, 2007
	($000)
Investment Income
Income
Dividends	5,562
Interest	15,333
Total Income	20,895
Expenses
The Vanguard Group—Note B
Investment Advisory Services	72
Management and Administrative	602
Marketing and Distribution	111
Auditing Fees	20
Shareholders’ Reports	21
Trustees’ Fees and Expenses	1
Total Expenses	827
Net Investment Income	20,068
Realized Net Gain (Loss) on Investment Securities Sold	11,106
Change in Unrealized Appreciation (Depreciation) of Investment Securities	3,271
Net Increase (Decrease) in Net Assets Resulting from Operations	34,445

 

 

 

 

 

 

 

 

 

 

 

 

13

Tax-Managed Balanced Fund

 

Statement of Changes in Net Assets

 

	Year Ended December 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	20,068	17,954
Realized Net Gain (Loss)	11,106	5,417
Change in Unrealized Appreciation (Depreciation)	3,271	31,865
Net Increase (Decrease) in Net Assets Resulting from Operations	34,445	55,236
Distributions
Net Investment Income	(20,228)	(17,991)
Realized Capital Gain	—	—
Total Distributions	(20,228)	(17,991)
Capital Share Transactions—Note E
Issued	74,389	54,013
Issued in Lieu of Cash Distributions	16,991	15,248
Redeemed 1	(45,918)	(50,805)
Net Increase (Decrease) from Capital Share Transactions	45,462	18,456
Total Increase (Decrease)	59,679	55,701
Net Assets
Beginning of Period	662,160	606,459
End of Period 2	721,839	662,160

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Net of redemption fees of $131,000 and $164,000.

2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($995,000) and ($837,000).

 

 

14

Tax-Managed Balanced Fund

 

Financial Highlights

 

	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$20.02	$18.88	$18.49	$17.72	$15.54
Investment Operations
Net Investment Income	.588	.54	.496	.48 1	.42
Net Realized and Unrealized Gain (Loss)
on Investments 2	.430	1.15	.380	.77	2.20
Total from Investment Operations	1.018	1.69	.876	1.25	2.62
Distributions
Dividends from Net Investment Income 3	(.588)	(.55)	(.486)	(.48)	(.44)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.588)	(.55)	(.486)	(.48)	(.44)
Net Asset Value, End of Period	$20.45	$20.02	$18.88	$18.49	$17.72
Total Return 4	5.11%	9.09%	4.80%	7.16%	17.05%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$722	$662	$606	$561	$498
Ratio of Total Expenses to
Average Net Assets	0.12%	0.12%	0.12%	0.12%	0.17%
Ratio of Net Investment Income to
Average Net Assets	2.86%	2.84%	2.64%	2.70% 1	2.58%
Portfolio Turnover Rate	10%	4%	10%	15%	16%

 

 

 

 

 

 

 

 

 

1 Net investment income per share and ratio of net investment income to average net assets include $.02 and 0.13%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Includes increases from redemption fees of $.00, $.00, $.01, $.01, and $.01.

3 For tax purposes, nontaxable dividends represent 73%, 74%, 76%, 73%, and 77% of dividends from net investment income.

4 Total returns do not reflect the 1% redemption fee on shares held less than five years; the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year; or the account service fee that may be applicable to certain accounts with balances below $10,000.

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

 

 

15

Tax-Managed Balanced Fund

 

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.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. 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. 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. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

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

 

4. Other: Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Premiums and discounts on municipal bonds 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

B . The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At December 31, 2007, the fund had contributed capital of $60,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.06% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. 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.

 

16

Tax-Managed Balanced Fund

 

For tax purposes, at December 31, 2007, the fund had $69,000 of ordinary income available for distribution. The fund had available realized losses of $16,652,000 to offset future net capital gains of $7,309,000 through December 31, 2010, and $9,343,000 through December 31, 2011.

 

At December 31, 2007, the cost of investment securities for tax purposes was $559,598,000. Net unrealized appreciation of investment securities for tax purposes was $157,177,000, consisting of unrealized gains of $162,612,000 on securities that had risen in value since their purchase and $5,435,000 in unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended December 31, 2007, the fund purchased $124,029,000 of investment securities and sold $68,552,000 of investment securities, other than temporary cash investments.

 

E. Capital shares issued and redeemed were:

 

	Year Ended December 31,
	2007	2006
	Shares	Shares
	(000)	(000)
Issued	3,636	2,805
Issued in Lieu of Cash Distributions	830	788
Redeemed	(2,246)	(2,640)
Net Increase (Decrease) in Shares Outstanding	2,220	953

 

F. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, effective for the fund’s current fiscal year. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that no provision for income tax is required in the fund’s financial statements.

 

 

 

 

 

 

 

 

 

 

 

17

Tax-Managed Growth and Income Fund

 

Fund Profile

As of December 31, 2007

 

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	507	500	4,843
Median Market Cap	$55.7B	$55.7B	$37.7B
Price/Earnings Ratio	16.9x	16.9x	17.8x
Price/Book Ratio	2.8x	2.8x	2.7x
Yield		2.0%	1.8%
Investor Shares	1.9%
Admiral Shares	1.9%
Institutional Shares	1.9%
Return on Equity	20.4%	20.4%	19.2%
Earnings Growth Rate	21.0%	21.0%	20.7%
Foreign Holdings	0.1%	0.0%	0.0%
Turnover Rate	5.4%	—	—
Expense Ratio		—	—
Investor Shares	0.15%
Admiral Shares	0.09%
Institutional Shares	0.07%
Short-Term Reserves	0.0%	—	—

 

 

Volatility Measures 3
	Fund Versus	Fund Versus
	Comparative Index 1	Broad Index 2
R-Squared	1.00	0.97
Beta	1.00	0.92

 

 

Investment Focus

 

 

 

 

 

 

 

18

 

Sector Diversification (% of equity exposure)
		Comparative	Broad
	Fund	Index 1	Index 2
Consumer Discretionary	8.5%	8.5%	9.4%
Consumer Staples	10.2	10.2	8.9
Energy	12.9	12.9	12.3
Financials	17.7	17.7	18.3
Health Care	12.0	12.0	12.0
Industrials	11.5	11.5	11.7
Information Technology	16.7	16.7	16.5
Materials	3.3	3.3	3.8
Telecommunication Services	3.6	3.6	3.3
Utilities	3.6	3.6	3.8

 

 

Ten Largest Holdings 4 (% of total net assets)
ExxonMobil Corp.	integrated oil and gas	4.0%
General Electric Co.	industrial conglomerates	2.9
Microsoft Corp.	systems software	2.2
AT&T Inc.	integrated telecommunication services	2.0
The Procter & Gamble Co.	household products	1.8
Chevron Corp.	integrated oil and gas	1.5
Johnson & Johnson	pharmaceuticals	1.5
Bank of America Corp.	diversified financial services	1.4
Apple Inc.	computer hardware	1.3
Cisco Systems, Inc.	communications equipment	1.3
Top Ten		19.9%

 

 

1 S&P 500 Index.

2 Dow Jones Wilshire 5000 Index.

3 For an explanation of R-squared , beta , and other terms used here, see the Glossary on pages 64–65.

4 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

19

Tax-Managed Growth and Income Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: December 31, 1997–December 31, 2007

Initial Investment of $10,000

 

 

	Average Annual Total Returns			Final Value
	Periods Ended December 31, 2007			of a $10,000
	One Year	Five Years	Ten Years	Investment
Tax-Managed Growth and Income Fund
Investor Shares 1	5.39%	12.75%	5.91%	$17,756
Fee-Adjusted Returns 2	4.35	12.75	5.91	17,756
Dow Jones Wilshire 5000 Index	5.73	14.07	6.34	18,492
S&P 500 Index	5.49	12.83	5.91	17,756
Average Large-Cap Core Fund 3	5.73	11.24	4.62	15,702

 

 

				Final Value
			Since	of a $100,000
	One Year	Five Years	Inception 4	Investment
Tax-Managed Growth and Income Fund
Admiral Shares	5.47%	12.81%	6.45%	$146,757
Fee-Adjusted Returns 2	4.43	12.81	6.45	146,757
Dow Jones Wilshire 5000 Index	5.73	14.07	7.89	159,379
S&P 500 Index	5.49	12.83	6.43	146,537

 

 

1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years, but not of the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Derived from data provided by Lipper Inc.

4 Performance for the fund’s Admiral Shares and comparative standards is calculated since the Admiral Shares’ inception: November 12, 2001.

 

 

20

Tax-Managed Growth and Income Fund

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value of
	One	Five	Since	a $5,000,000
	Year	Years	Inception 1	Investment
Tax-Managed Growth and Income Fund
Institutional Shares	5.47%	12.84%	3.61%	$6,837,366
Fee-Adjusted Returns 2	4.44	12.84	3.61	6,837,366
Dow Jones Wilshire 5000 Index	5.73	14.07	4.60	7,439,681
S&P 500 Index	5.49	12.83	3.53	6,791,985

 

 

Fiscal-Year Total Returns (%): December 31, 1997–December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Performance for the fund’s Institutional Shares and comparative standards is calculated since the Institutional Shares’ inception: March 4, 1999.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years.

Note: See Financial Highlights tables on pages 22–24 for dividend and capital gains information.

 

 

21

Tax-Managed Growth and Income Fund

 

Financial Statements

 

The Statement of Net Assets —an integral part of the Financial Statements for Vanguard Tax-Managed Growth and Income Fund—is included as an insert to this report.

 

Statement of Operations

 

	Year Ended
	December 31, 2007
	($000)
Investment Income
Income
Dividends	64,021
Interest 1	94
Total Income	64,115
Expenses
The Vanguard Group—Note B
Investment Advisory Services	159
Management and Administrative
Investor Shares	941
Admiral Shares	1,415
Institutional Shares	198
Marketing and Distribution
Investor Shares	128
Admiral Shares	285
Institutional Shares	74
Custodian Fees	44
Auditing Fees	21
Shareholders’ Reports
Investor Shares	28
Admiral Shares	8
Institutional Shares	—
Trustees’ Fees and Expenses	4
Total Expenses	3,305
Net Investment Income	60,810
Realized Net Gain (Loss) on Investment Securities Sold	35,978
Change in Unrealized Appreciation (Depreciation) of Investment Securities	74,149
Net Increase (Decrease) in Net Assets Resulting from Operations	170,937

 

 

 

 

 

 

 

1 Interest income from an affiliated company of the fund was $92,000.

 

 

22

Tax-Managed Growth and Income Fund

 

Statement of Changes in Net Assets

 

	Year Ended December 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	60,810	51,378
Realized Net Gain (Loss)	35,978	2,041
Change in Unrealized Appreciation (Depreciation)	74,149	368,009
Net Increase (Decrease) in Net Assets Resulting from Operations	170,937	421,428
Distributions
Net Investment Income
Investor Shares	(13,730)	(13,535)
Admiral Shares	(38,541)	(31,978)
Institutional Shares	(8,409)	(6,367)
Realized Capital Gain
Investor Shares	—	—
Admiral Shares	—	—
Institutional Shares	—	—
Total Distributions	(60,680)	(51,880)
Capital Share Transactions—Note E
Investor Shares	(72,742)	(122,838)
Admiral Shares	110,589	134,096
Institutional Shares	66,688	42,048
Net Increase (Decrease) from Capital Share Transactions	104,535	53,306
Total Increase (Decrease)	214,792	422,854
Net Assets
Beginning of Period	3,106,825	2,683,971
End of Period 1	3,321,617	3,106,825

 

 

 

 

 

 

 

 

 

 

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($3,589,000) and ($3,721,000).

 

 

23

Tax-Managed Growth and Income Fund

 

Financial Highlights

 

Investor Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$30.87	$27.15	$26.36	$24.23	$19.15
Investment Operations
Net Investment Income	.578	.504	.467	.47 1	.34
Net Realized and Unrealized Gain (Loss)
on Investments	1.089	3.727	.801	2.13	5.08
Total from Investment Operations	1.667	4.231	1.268	2.60	5.42
Distributions
Dividends from Net Investment Income	(.577)	(.511)	(.478)	(.47)	(.34)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.577)	(.511)	(.478)	(.47)	(.34)
Net Asset Value, End of Period	$31.96	$30.87	$27.15	$26.36	$24.23
Total Return 2	5.39%	15.73%	4.87%	10.83%	28.53%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$740	$784	$806	$1,395	$1,321
Ratio of Total Expenses to
Average Net Assets	0.15%	0.15%	0.14%	0.14%	0.17%
Ratio of Net Investment Income to
Average Net Assets	1.80%	1.77%	1.78%	1.89% 1	1.63%
Portfolio Turnover Rate	5%	6%	10%	8%	5%

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.08 and 0.31%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years; the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year; or the account service fee that may be applicable to certain accounts with balances below $10,000.

 

 

24

Tax-Managed Growth and Income Fund

 

 

Admiral Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$63.44	$55.80	$54.17	$49.80	$39.35
Investment Operations
Net Investment Income	1.230	1.069	.989	.99 1	.733
Net Realized and Unrealized Gain (Loss)
on Investments	2.245	7.648	1.645	4.37	10.443
Total from Investment Operations	3.475	8.717	2.634	5.36	11.176
Distributions
Dividends from Net Investment Income	(1.225)	(1.077)	(1.004)	(.99)	(.726)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(1.225)	(1.077)	(1.004)	(.99)	(.726)
Net Asset Value, End of Period	$65.69	$63.44	$55.80	$54.17	$49.80
Total Return 2	5.47%	15.77%	4.93%	10.87%	28.64%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$2,113	$1,935	$1,575	$954	$777
Ratio of Total Expenses to
Average Net Assets	0.09%	0.10%	0.10%	0.10%	0.11%
Ratio of Net Investment Income to
Average Net Assets	1.86%	1.82%	1.82%	1.96% 1	1.69%
Portfolio Turnover Rate	5%	6%	10%	8%	5%

 

 

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.16 and 0.31%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

 

 

25

Tax-Managed Growth and Income Fund

 

 

Institutional Shares
			Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$30.87	$27.15	$26.36	$24.24	$19.15
Investment Operations
Net Investment Income	.604	.527	.485	.479 1	.369
Net Realized and Unrealized Gain (Loss)
on Investments	1.089	3.727	.801	2.130	5.080
Total from Investment Operations	1.693	4.254	1.286	2.609	5.449
Distributions
Dividends from Net Investment Income	(.603)	(.534)	(.496)	(.489)	(.359)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.603)	(.534)	(.496)	(.489)	(.359)
Net Asset Value, End of Period	$31.96	$30.87	$27.15	$26.36	$24.24
Total Return 2	5.47%	15.82%	4.94%	10.87%	28.69%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$469	$389	$303	$266	$217
Ratio of Total Expenses to
Average Net Assets	0.07%	0.07%	0.07%	0.07%	0.08%
Ratio of Net Investment Income to
Average Net Assets	1.88%	1.85%	1.85%	1.97% 1	1.72%
Portfolio Turnover Rate	5%	6%	10%	8%	5%

 

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.077 and 0.31%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

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

 

 

26

Tax-Managed Growth and Income Fund

 

Notes to Financial Statements

 

Vanguard Tax-Managed Growth and Income Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. 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 are designed for investors who meet certain administrative, service, tenure, and account-size criteria. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. 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. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

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

 

4. 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. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

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. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At December 31, 2007, the fund had contributed capital of $280,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.28% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. 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

 

27

Tax-Managed Growth and Income Fund

 

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.

 

For tax purposes, at December 31, 2007, the fund had $956,000 of ordinary income available for distribution. The fund had available realized losses of $405,325,000 to offset future net capital gains of $78,029,000 through December 31, 2009, $201,652,000 through December 31, 2010, $92,868,000 through December 31, 2011, $31,345,000 through December 31, 2013, and $1,431,000 through December 31, 2014.

 

At December 31, 2007, the cost of investment securities for tax purposes was $2,086,571,000. Net unrealized appreciation of investment securities for tax purposes was $1,235,931,000, consisting of unrealized gains of $1,325,450,000 on securities that had risen in value since their purchase and $89,519,000 in unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended December 31, 2007, the fund purchased $284,465,000 of investment securities and sold $175,516,000 of investment securities, other than temporary cash investments.

 

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

 

 

			Year Ended December 31,
		2007		2006
	Amount	Shares	Amount	Shares
	($000)	(000)	($000)	(000)
Investor Shares
Issued	73,362	2,292	70,085	2,458
Issued in Lieu of Cash Distributions	12,000	371	11,722	407
Redeemed 1	(158,104)	(4,910)	(204,645)	(7,168)
Net Increase (Decrease)—Investor Shares	(72,742)	(2,247)	(122,838)	(4,303)
Admiral Shares
Issued	212,892	3,220	206,113	3,509
Issued in Lieu of Cash Distributions	30,628	461	25,316	426
Redeemed 1	(132,931)	(2,008)	(97,333)	(1,661)
Net Increase (Decrease)—Admiral Shares	110,589	1,673	134,096	2,274
Institutional Shares
Issued	68,637	2,135	55,863	1,933
Issued in Lieu of Cash Distributions	5,852	181	4,524	157
Redeemed 1	(7,801)	(238)	(18,339)	(662)
Net Increase (Decrease)—Institutional Shares	66,688	2,078	42,048	1,428

 

 

F. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, effective for the fund’s current fiscal year. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that no provision for income tax is required in the fund’s financial statements.

 

1 Net of redemption fees for 2007 and 2006 of $286,000 and $423,000, respectively (fund totals).

 

28

Tax-Managed Capital Appreciation Fund

 

Fund Profile

As of December 31, 2007

 

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	659	999	4,843
Median Market Cap	$38.9B	$43.3B	$37.7B
Price/Earnings Ratio	17.4x	17.3x	17.8x
Price/Book Ratio	2.8x	2.8x	2.7x
Yield		1.9%	1.8%
Investor Shares	1.5%
Admiral Shares	1.6%
Institutional Shares	1.6%
Return on Equity	19.9%	19.9%	19.2%
Earnings Growth Rate	21.4%	21.1%	20.7%
Foreign Holdings	0.1%	0.0%	0.0%
Turnover Rate	5.2%	—	—
Expense Ratio		—	—
Investor Shares	0.15%
Admiral Shares	0.09%
Institutional Shares	0.07%
Short-Term Reserves	0.0%	—	—

 

 

Volatility Measures 3
	Fund Versus	Fund Versus
	Comparative Index 1	Broad Index 2
R-Squared	0.99	0.99
Beta	1.04	0.99

 

 

Investment Focus

 

 

 

 

 

 

29

Sector Diversification (% of equity exposure)
		Comparative	Broad
	Fund	Index 1	Index 2
Consumer Discretionary	9.5%	9.3%	9.4%
Consumer Staples	9.6	9.6	8.9
Energy	12.4	12.4	12.3
Financials	17.1	17.5	18.3
Health Care	12.2	11.8	12.0
Industrials	12.0	11.8	11.7
Information Technology	16.5	16.5	16.5
Materials	3.7	3.7	3.8
Telecommunication Services	3.4	3.5	3.3
Utilities	3.6	3.9	3.8

 

 

Ten Largest Holdings 4 (% of total net assets)
ExxonMobil Corp.	integrated oil and gas	3.5%
General Electric Co.	industrial conglomerates	2.4
Microsoft Corp.	systems software	1.9
AT&T Inc.	integrated telecommunication services	1.6
The Procter & Gamble Co.	household products	1.6
Johnson & Johnson	pharmaceuticals	1.3
Chevron Corp.	integrated oil and gas	1.2
Apple Inc.	computer hardware	1.2
Cisco Systems, Inc.	communications equipment	1.2
Bank of America Corp.	diversified financial services	1.1
Top Ten		17.0%

 

 

1 Russell 1000 Index.

2 Dow Jones Wilshire 5000 Index.

3 For an explanation of R-squared , beta , and other terms used here, see the Glossary on pages 64–65.

4 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

 

30

Tax-Managed Capital Appreciation Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: December 31, 1997–December 31, 2007

Initial Investment of $10,000

 

 

 

	Average Annual Total Returns			Final Value
	Periods Ended December 31, 2007			of a $10,000
	One Year	Five Years	Ten Years	Investment
Tax-Managed Capital Appreciation Fund
Investor Shares 1	6.07%	13.93%	6.68%	$19,099
Fee-Adjusted Returns 2	5.03	13.93	6.68	19,099
Dow Jones Wilshire 5000 Index	5.73	14.07	6.34	18,492
Russell 1000 Index	5.77	13.43	6.20	18,243
Average Multi-Cap Core Fund 3	6.43	13.14	6.13	18,135

 

 

				Final Value of
	One	Five	Since	a $100,000
	Year	Years	Inception 4	Investment
Tax-Managed Capital Appreciation Fund
Admiral Shares	6.11%	13.98%	7.26%	$153,704
Fee-Adjusted Returns 2	5.06	13.98	7.26	153,704
Dow Jones Wilshire 5000 Index	5.73	14.07	7.89	159,379
Russell 1000 Index	5.77	13.43	7.06	151,980

 

 

 

1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years, but not of the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Derived from data provided by Lipper Inc.

4 Performance for the fund’s Admiral Shares and comparative standards is calculated since the Admiral Shares’ inception: November 12, 2001.

 

 

31

Tax-Managed Capital Appreciation Fund

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value of
	One	Five	Since	a $5,000,000
	Year	Years	Inception 1	Investment
Tax-Managed Capital Appreciation Fund
Institutional Shares	6.13%	14.02%	4.43%	$7,338,673
Fee-Adjusted Returns 2	5.09	14.02	4.43	7,338,673
Dow Jones Wilshire 5000 Index	5.73	14.07	4.54	7,404,784
Russell 1000 Index	5.77	13.43	3.99	7,071,132

 

 

Fiscal-Year Total Returns (%): December 31, 1997–December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Performance for the fund’s Institutional Shares and comparative standards is calculated since the Institutional Shares’ inception: February 24, 1999.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years.

Note: See Financial Highlights tables on pages 32–34 for dividend and capital gains information.

 

 

32

Tax-Managed Capital Appreciation Fund

 

Financial Statements

 

The Statement of Net Assets —an integral part of the Financial Statements for Vanguard Tax-Managed Capital Appreciation Fund—is included as an insert to this report.

 

Statement of Operations

 

	Year Ended
	December 31, 2007
	($000)
Investment Income
Income
Dividends	71,082
Interest 1	166
Total Income	71,248
Expenses
The Vanguard Group—Note B
Investment Advisory Services	184
Management and Administrative
Investor Shares	1,008
Admiral Shares	2,200
Institutional Shares	136
Marketing and Distribution
Investor Shares	136
Admiral Shares	447
Institutional Shares	33
Custodian Fees	30
Auditing Fees	22
Shareholders’ Reports
Investor Shares	21
Admiral Shares	12
Institutional Shares	—
Trustees’ Fees and Expenses	5
Total Expenses	4,234
Net Investment Income	67,014
Realized Net Gain (Loss) on Investment Securities Sold	98,261
Change in Unrealized Appreciation (Depreciation) of Investment Securities	80,336
Net Increase (Decrease) in Net Assets Resulting from Operations	245,611

 

 

 

 

 

 

 

1 Interest income from an affiliated company of the fund was $162,000.

 

 

33

Tax-Managed Capital Appreciation Fund

 

Statement of Changes in Net Assets

 

	Year Ended December 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	67,014	56,933
Realized Net Gain (Loss)	98,261	59,140
Change in Unrealized Appreciation (Depreciation)	80,336	385,292
Net Increase (Decrease) in Net Assets Resulting from Operations	245,611	501,365
Distributions
Net Investment Income
Investor Shares	(11,701)	(11,552)
Admiral Shares	(51,242)	(42,410)
Institutional Shares	(4,621)	(3,220)
Realized Capital Gain
Investor Shares	—	—
Admiral Shares	—	—
Institutional Shares	—	—
Total Distributions	(67,564)	(57,182)
Capital Share Transactions—Note E
Investor Shares	(88,449)	(124,968)
Admiral Shares	209,970	262,868
Institutional Shares	64,602	(10,718)
Net Increase (Decrease) from Capital Share Transactions	186,123	127,182
Total Increase (Decrease)	364,170	571,365
Net Assets
Beginning of Period	3,991,610	3,420,245
End of Period 1	4,355,780	3,991,610

 

 

 

 

 

 

 

 

 

 

 

 

34

Tax-Managed Capital Appreciation Fund

 

Financial Highlights

 

Investor Shares
			Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$33.62	$29.80	$28.05	$25.43	$19.49
Investment Operations
Net Investment Income	.530	.471	.352	.365 1	.238
Net Realized and Unrealized Gain (Loss)
on Investments	1.513	3.821	1.752	2.622	5.940
Total from Investment Operations	2.043	4.292	2.104	2.987	6.178
Distributions
Dividends from Net Investment Income	(.533)	(.472)	(.354)	(.367)	(.238)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.533)	(.472)	(.354)	(.367)	(.238)
Net Asset Value, End of Period	$35.13	$33.62	$29.80	$28.05	$25.43
Total Return 2	6.07%	14.40%	7.49%	11.75%	31.72%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$782	$832	$857	$1,596	$1,466
Ratio of Total Expenses to
Average Net Assets	0.15%	0.15%	0.14%	0.14%	0.17%
Ratio of Net Investment Income to
Average Net Assets	1.51%	1.51%	1.25%	1.40% 1	1.09%
Portfolio Turnover Rate	5%	5%	8%	5%	11%

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.061 and 0.24%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years; the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year; or the account service fee that may be applicable to certain accounts with balances below $10,000.

 

 

35

Tax-Managed Capital Appreciation Fund

 

 

Admiral Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$67.68	$60.00	$56.46	$51.20	$39.24
Investment Operations
Net Investment Income	1.113	.99	.729	.762 1	.51
Net Realized and Unrealized Gain (Loss)
on Investments	3.026	7.68	3.543	5.263	11.96
Total from Investment Operations	4.139	8.67	4.272	6.025	12.47
Distributions
Dividends from Net Investment Income	(1.119)	(.99)	(.732)	(.765)	(.51)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(1.119)	(.99)	(.732)	(.765)	(.51)
Net Asset Value, End of Period	$70.70	$67.68	$60.00	$56.46	$51.20
Total Return 2	6.11%	14.44%	7.56%	11.77%	31.80%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$3,283	$2,941	$2,360	$1,397	$1,103
Ratio of Total Expenses to
Average Net Assets	0.09%	0.10%	0.10%	0.10%	0.11%
Ratio of Net Investment Income to
Average Net Assets	1.57%	1.56%	1.29%	1.47% 1	1.16%
Portfolio Turnover Rate	5%	5%	8%	5%	11%

 

 

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.122 and 0.24%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

 

 

36

Tax-Managed Capital Appreciation Fund

 

 

Institutional Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$33.63	$29.81	$28.05	$25.44	$19.49
Investment Operations
Net Investment Income	.551	.50	.384	.375 1	.267
Net Realized and Unrealized Gain (Loss)
on Investments	1.513	3.82	1.752	2.622	5.940
Total from Investment Operations	2.064	4.32	2.136	2.997	6.207
Distributions
Dividends from Net Investment Income	(.564)	(.50)	(.376)	(.387)	(.257)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.564)	(.50)	(.376)	(.387)	(.257)
Net Asset Value, End of Period	$35.13	$33.63	$29.81	$28.05	$25.44
Total Return 2	6.13%	14.49%	7.61%	11.78%	31.87%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$291	$218	$204	$102	$104
Ratio of Total Expenses to
Average Net Assets	0.07%	0.07%	0.07%	0.07%	0.08%
Ratio of Net Investment Income to
Average Net Assets	1.59%	1.59%	1.32%	1.47% 1	1.17%
Portfolio Turnover Rate	5%	5%	8%	5%	11%

 

 

 

 

 

 

 

 

 

 

 

1 Net investment income per share and the ratio of net investment income to average net assets include $.061 and 0.24%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

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

 

 

37

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 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 are designed for investors who meet certain administrative, service, tenure, and account-size criteria. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. 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. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

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

 

4. 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. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

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. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At December 31, 2007, the fund had contributed capital of $367,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.37% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. 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.

38

Tax-Managed Capital Appreciation Fund

 

For tax purposes, at December 31, 2007, the fund had $981,000 of ordinary income available for distribution. The fund had available realized losses of $409,583,000 to offset future net capital gains of $139,756,000 through December 31, 2009, $106,018,000 through December 31, 2010, and $163,809,000 through December 31, 2011.

 

At December 31, 2007, the cost of investment securities for tax purposes was $2,549,541,000. Net unrealized appreciation of investment securities for tax purposes was $1,804,650,000, consisting of unrealized gains of $1,897,028,000 on securities that had risen in value since their purchase and $92,378,000 in unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended December 31, 2007, the fund purchased $410,019,000 of investment securities and sold $221,201,000 of investment securities, other than temporary cash investments.

 

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

 

 

			Year Ended December 31,
		2007		2006
	Amount	Shares	Amount	Shares
	($000)	(000)	($000)	(000)
Investor Shares
Issued	101,346	2,866	85,007	2,726
Issued in Lieu of Cash Distributions	10,399	295	10,331	306
Redeemed 1	(200,194)	(5,646)	(220,306)	(7,022)
Net Increase (Decrease)—Investor Shares	(88,449)	(2,485)	(124,968)	(3,990)
Admiral Shares
Issued	353,092	4,963	357,983	5,676
Issued in Lieu of Cash Distributions	40,477	570	34,083	502
Redeemed 1	(183,599)	(2,562)	(129,198)	(2,054)
Net Increase (Decrease)—Admiral Shares	209,970	2,971	262,868	4,124
Institutional Shares
Issued	84,902	2,375	15,940	515
Issued in Lieu of Cash Distributions	2,702	77	1,584	47
Redeemed 1	(23,002)	(652)	(28,242)	(910)
Net Increase (Decrease)—Institutional Shares	64,602	1,800	(10,718)	(348)

 

 

F. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, effective for the fund’s current fiscal year. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that no provision for income tax is required in the fund’s financial statements.

 

 

1 Net of redemption fees for 2007 and 2006 of $374,000 and $468,000, respectively (fund totals).

 

39

Tax-Managed Small-Cap Fund

 

Fund Profile

As of December 31, 2007

 

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	601	600	4,843
Median Market Cap	$1.3B	$1.3B	$37.7B
Price/Earnings Ratio	20.2x	20.2x	17.8x
Price/Book Ratio	2.2x	2.1x	2.7x
Yield		1.0%	1.8%
Investor Shares	0.9%
Institutional Shares	0.9%
Return on Equity	14.1%	13.9%	19.2%
Earnings Growth Rate	21.9%	20.9%	20.7%
Foreign Holdings	0.0%	0.0%	0.0%
Turnover Rate	52.7%	—	—
Expense Ratio		—	—
Investor Shares	0.13%
Institutional Shares	0.09%
Short-Term Reserves	0.0%	—	—

 

 

Volatility Measures 3
	Fund Versus	Fund Versus
	Comparative Index 1	Broad Index 2
R-Squared	1.00	0.82
Beta	0.99	1.35

 

 

Investment Focus

 

 

 

 

 

 

 

40

 

Sector Diversification (% of equity exposure)
		Comparative	Broad
	Fund	Index 1	Index 2
Consumer Discretionary	11.8%	12.8%	9.4%
Consumer Staples	3.6	3.5	8.9
Energy	8.7	8.3	12.3
Financials	14.9	16.0	18.3
Health Care	14.3	13.9	12.0
Industrials	17.5	16.9	11.7
Information Technology	19.4	19.3	16.5
Materials	4.5	4.4	3.8
Telecommunication Services	0.1	0.1	3.3
Utilities	5.2	4.8	3.8

 

 

Ten Largest Holdings 4 (% of total net assets)
Shaw Group, Inc.	construction and engineering	1.0%
Respironics, Inc.	health care equipment	1.0
FLIR Systems, Inc.	electronic equipment manufacturers	0.9
Cabot Oil & Gas Corp.	oil and gas exploration and production	0.8
Helix Energy Solutions Group, Inc.	oil and gas equipment and services	0.8
Oceaneering International, Inc.	oil and gas equipment and services	0.8
Trimble Navigation Ltd.	electronic manufacturing services	0.8
IDEXX Laboratories Corp.	health care equipment	0.8
Pediatrix Medical Group, Inc.	health care services	0.7
MGI Pharma, Inc.	pharmaceuticals	0.7
Top Ten		8.3%

 

 

 

 

 

 

 

 

 

 

 

1 S&P SmallCap 600 Index.

2 Dow Jones Wilshire 5000 Index.

3 For an explanation of R-squared , beta , and other terms used here, see the Glossary on pages 64–65.

4 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

41

Tax-Managed Small-Cap Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: March 25, 1999–December 31, 2007

Initial Investment of $10,000

 

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value
	One	Five	Since	of a $10,000
	Year	Years	Inception 1	Investment
Tax-Managed Small-Cap Fund Investor Shares 2	0.51%	16.03%	12.08%	$27,179
Fee-Adjusted Returns 3	–0.49	16.03	12.08	27,179
Dow Jones Wilshire 5000 Index	5.73	14.07	4.28	14,448
S&P SmallCap 600 Index	–0.30	16.04	11.85	26,712
Average Small-Cap Core Fund 4	–1.00	15.62	11.82	26,641

 

 

 

 

 

 

 

1 Performance for the fund’s Investor Shares and comparative standards is calculated since the Investor Shares’ inception: March 25, 1999.

2 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years, but not of the account service fee that may be applicable to certain accounts with balances below $10,000.

4 Derived from data provided by Lipper Inc.

 

 

42

Tax-Managed Small-Cap Fund

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value of
	One	Five	Since	a $5,000,000
	Year	Years	Inception 1	Investment
Tax-Managed Small-Cap Fund Institutional Shares	0.51%	16.09%	11.36%	$12,741,377
Fee-Adjusted Returns 2	–0.48	16.09	11.36	12,741,377
Dow Jones Wilshire 5000 Index	5.73	14.07	3.81	6,919,260
S&P SmallCap 600 Index	–0.30	16.04	11.11	12,500,489

 

 

Fiscal-Year Total Returns (%): March 25, 1999–December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Performance for the fund’s Institutional Shares and comparative standards is calculated since the Institutional Shares’ inception: April 21, 1999.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years.

Note: See Financial Highlights tables on pages 42 and 43 for dividend and capital gains information.

 

 

43

Tax-Managed Small-Cap Fund

 

Financial Statements

 

The Statement of Net Assets —an integral part of the Financial Statements for Vanguard Tax-Managed Small-Cap Fund—is included as an insert to this report.

 

Statement of Operations

 

	Year Ended
	December 31, 2007
	($000)
Investment Income
Income
Dividends 1	19,803
Interest 1	226
Total Income	20,029
Expenses
The Vanguard Group—Note B
Investment Advisory Services	128
Management and Administrative
Investor Shares	1,878
Institutional Shares	86
Marketing and Distribution
Investor Shares	336
Institutional Shares	39
Custodian Fees	71
Auditing Fees	22
Shareholders’ Reports
Investor Shares	30
Institutional Shares	—
Trustees’ Fees and Expenses	2
Total Expenses	2,592
Expenses Paid Indirectly—Note C	(28)
Net Expenses	2,564
Net Investment Income	17,465
Realized Net Gain (Loss) on Investment Securities Sold 1	107,257
Change in Unrealized Appreciation (Depreciation) of Investment Securities	(113,587)
Net Increase (Decrease) in Net Assets Resulting from Operations	11,135

 

 

 

 

 

 

 

1 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $0, $225,000, and ($4,631,000), respectively.

 

 

44

Tax-Managed Small-Cap Fund

 

Statement of Changes in Net Assets

 

	Year Ended December 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	17,465	13,729
Realized Net Gain (Loss)	107,257	64,295
Change in Unrealized Appreciation (Depreciation)	(113,587)	146,889
Net Increase (Decrease) in Net Assets Resulting from Operations	11,135	224,913
Distributions
Net Investment Income
Investor Shares	(16,119)	(13,148)
Institutional Shares	(1,611)	(940)
Realized Capital Gain
Investor Shares	—	—
Institutional Shares	—	—
Total Distributions	(17,730)	(14,088)
Capital Share Transactions—Note F
Investor Shares	41,062	100,595
Institutional Shares	46,300	20,689
Net Increase (Decrease) from Capital Share Transactions	87,362	121,284
Total Increase (Decrease)	80,767	332,109
Net Assets
Beginning of Period	1,883,302	1,551,193
End of Period 1	1,964,069	1,883,302

 

 

 

 

 

 

 

 

 

 

 

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($1,914,000) and ($1,649,000).

 

 

45

Tax-Managed Small-Cap Fund

 

Financial Highlights

 

Investor Shares
			Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$25.72	$22.70	$21.25	$17.44	$12.67
Investment Operations
Net Investment Income	.229	.191	.193	.172	.109
Net Realized and Unrealized Gain (Loss)
on Investments 1	(.097)	3.023	1.454	3.811	4.770
Total from Investment Operations	.132	3.214	1.647	3.983	4.879
Distributions
Dividends from Net Investment Income	(.232)	(.194)	(.197)	(.173)	(.109)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.232)	(.194)	(.197)	(.173)	(.109)
Net Asset Value, End of Period	$25.62	$25.72	$22.70	$21.25	$17.44
Total Return 2	0.51%	14.15%	7.74%	22.84%	38.51%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$1,793	$1,756	$1,458	$1,282	$929
Ratio of Total Expenses to
Average Net Assets	0.13%	0.14%	0.14%	0.14%	0.17%
Ratio of Net Investment Income to
Average Net Assets	0.86%	0.78%	0.92%	0.96%	0.77%
Portfolio Turnover Rate 3	53%	42%	20%	19%	21%

 

 

 

 

 

 

 

 

 

 

1 Includes increases from redemption fees of $.01, $.01, $.01, $.01, and $.01.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years; the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year; or the account service fee that may be applicable to certain accounts with balances below $10,000.

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.

 

 

46

Tax-Managed Small-Cap Fund

 

 

Institutional Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$25.77	$22.74	$21.28	$17.47	$12.68
Investment Operations
Net Investment Income	.242	.209	.213	.178	.134
Net Realized and Unrealized Gain (Loss)
on Investments 1	(.108)	3.028	1.454	3.811	4.770
Total from Investment Operations	.134	3.237	1.667	3.989	4.904
Distributions
Dividends from Net Investment Income	(.244)	(.207)	(.207)	(.179)	(.114)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.244)	(.207)	(.207)	(.179)	(.114)
Net Asset Value, End of Period	$25.66	$25.77	$22.74	$21.28	$17.47
Total Return 2	0.51%	14.23%	7.82%	22.83%	38.68%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$171	$128	$94	$15	$12
Ratio of Total Expenses to
Average Net Assets	0.09%	0.09%	0.09%	0.09%	0.10%
Ratio of Net Investment Income to
Average Net Assets	0.90%	0.83%	0.97%	1.01%	0.84%
Portfolio Turnover Rate 3	53%	42%	20%	19%	21%

 

 

 

 

 

 

 

 

 

 

1 Includes increases from redemption fees of $.01, $.01, $.00, $.01, and $.01.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

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 .

 

 

47

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: Investor Shares and Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. 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. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

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

 

4. 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. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

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. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At December 31, 2007, the fund had contributed capital of $165,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.16% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers 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 year ended December 31, 2007, custodian fee offset arrangements reduced the fund’s expenses by $28,000.

 

D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are

48

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 year ended December 31, 2007, the fund realized $148,434,000 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 gains to paid-in capital.

 

For tax purposes, at December 31, 2007, the fund had $326,000 of ordinary income available for distribution. The fund had available realized losses of $38,528,000 to offset future net capital gains of $2,167,000 through December 31, 2011, $9,132,000 through December 31, 2015, and $27,229,000 through December 31, 2016.

 

At December 31, 2007, the cost of investment securities for tax purposes was $1,382,300,000. Net unrealized appreciation of investment securities for tax purposes was $588,215,000, consisting of unrealized gains of $613,992,000 on securities that had risen in value since their purchase and $25,777,000 in unrealized losses on securities that had fallen in value since their purchase.

 

E. During the year ended December 31, 2007, the fund purchased $1,407,670,000 of investment securities and sold $1,314,632,000 of investment securities, other than temporary cash investments.

 

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

 

 

			Year Ended December 31,
		2007		2006
	Amount	Shares	Amount	Shares
	($000)	(000)	($000)	(000)
Investor Shares
Issued	446,451	16,708	285,353	11,437
Issued in Lieu of Cash Distributions	13,098	507	10,601	409
Redeemed 1	(418,487)	(15,473)	(195,359)	(7,809)
Net Increase (Decrease)—Investor Shares	41,062	1,742	100,595	4,037
Institutional Shares
Issued	46,719	1,725	59,307	2,411
Issued in Lieu of Cash Distributions	839	32	450	17
Redeemed 1	(1,258)	(48)	(39,068)	(1,594)
Net Increase (Decrease)—Institutional Shares	46,300	1,709	20,689	834

 

 

G. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, effective for the fund’s current fiscal year. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that no provision for income tax is required in the fund’s financial statements.

 

1 Net of redemption fees for 2007 and 2006 of $492,000 and $599,000, respectively (fund totals).

 

49

Tax-Managed International Fund

 

Fund Profile

As of December 31, 2007

 

Portfolio Characteristics
		Comparative	Broad
	Fund	Index 1	Index 2
Number of Stocks	1,154	1,211	2,237
Turnover Rate	5.9%	—	—
Expense Ratio		—	—
Investor Shares	0.15%
Institutional Shares	0.09%
ETF Shares	0.12% 3
Short-Term Reserves	0.0%	—	—

 

 

Volatility Measures 4
	Fund Versus	Fund Versus
	Comparative Index 1	Broad Index 2
R-Squared	0.98	0.95
Beta	1.01	0.88

 

 

Sector Diversification (% of equity exposure)
		Comparative	Broad
	Fund	Index 1	Index 2
Consumer Discretionary	10.9%	9.7%	9.2%
Consumer Staples	8.7	8.4	7.9
Energy	7.9	10.5	11.5
Financials	26.3	23.7	23.9
Health Care	6.4	7.5	6.9
Industrials	12.1	11.5	11.2
Information Technology	5.5	9.3	9.2
Materials	10.0	8.6	9.2
Telecommunication Services	6.3	5.8	6.2
Utilities	5.9	5.0	4.8

 

 

 

 

 

 

 

 

 

 

50

 

Ten Largest Holdings 5 (% of total net assets)
BP PLC	integrated oil and gas	1.7%
Vodafone Group PLC	wireless telecommunication services	1.4
HSBC Holdings PLC	diversified banks	1.4
Nestle SA (Registered)	packaged foods and meats	1.3
Total SA	integrated oil and gas	1.3
Nokia Oyj	communications equipment	1.1
Toyota Motor Corp.	automobile manufacturers	1.0
GlaxoSmithKline PLC	pharmaceuticals	1.0
Telefonica SA	integrated telecommunication services	1.0
Siemens AG	industrial conglomerate	1.0
Top Ten		12.2%

 

 

Fund Allocation by Region

 

 

 

1 MSCI EAFE Index.

2 MSCI All Country World Index ex USA.

3 Annualized.

4 For an explanation of R-squared , beta , and other terms used here, see the Glossary on pages 64–65.

5 “Ten Largest Holdings” excludes any temporary cash investments and equity index products.

 

 

 

 

 

 

 

 

 

 

 

 

51

Tax-Managed International Fund

 

 

Market Diversification (% of equity exposure)
			Comparative	Broad
		Fund	Index 1	Index 2
Europe
	United Kingdom	22.4%	22.2%	16.4%
	France	10.1	10.7	8.0
	Germany	9.4	9.4	7.0
	Switzerland	6.7	6.7	5.0
	Spain	4.4	4.4	3.3
	Italy	4.0	4.0	2.9
	Netherlands	2.9	2.8	2.1
	Sweden	2.3	2.3	1.7
	Finland	1.9	1.9	1.4
	Belgium	1.2	1.2	0.9
	Norway	1.1	1.1	0.8
	Denmark	0.9	0.9	0.7
	Greece	0.8	0.8	0.6
	Ireland	0.7	0.6	0.5
	Austria	0.6	0.6	0.4
	Luxembourg	0.5	0.0	0.0
	Portugal	0.4	0.4	0.3
Subtotal		70.3%	70.0%	52.0%
Pacific
	Japan	19.8%	19.9%	14.8%
	Australia	6.3	6.5	4.8
	Hong Kong	2.4	2.4	1.8
	Singapore	1.1	1.1	0.8
	New Zealand	0.1	0.1	0.1
Subtotal		29.7%	30.0%	22.3%
Emerging Markets
	Combined	0.0%	—	19.4%
North America
	Canada	0.0%	—	6.3%

 

 

1 MSCI EAFE Index.

2 MSCI All Country World Index ex USA.

 

 

 

 

 

 

 

 

 

52

Tax-Managed International Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: August 17, 1999–December 31, 2007

Initial Investment of $10,000

 

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value
	One	Five	Since	of a $10,000
	Year	Years	Inception 1	Investment
Tax-Managed International Fund Investor Shares 2	11.15%	21.60%	7.28%	$18,014
Fee-Adjusted Returns 3	10.07	21.60	7.28	18,014
MSCI All Country World Index ex USA	17.12	24.52	9.28	21,019
MSCI EAFE Index	11.17	21.59	7.28	18,011
Average International Fund 4	12.44	20.68	7.04	17,676

 

 

 

 

 

 

 

1 Performance for the fund’s Investor Shares and comparative standards is calculated since the Investor Shares’ inception: August 17, 1999.

2 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years, but not of the account service fee that may be applicable to certain accounts with balances below $10,000.

4 Derived from data provided by Lipper Inc.

 

 

53

Tax-Managed International Fund

 

 

	Average Annual Total Returns
	Periods Ended December 31, 2007			Final Value of
	One	Five	Since	a $5,000,000
	Year	Years	Inception 1	Investment
Tax-Managed International Fund Institutional Shares	11.21%	21.69%	8.46%	$8,817,517
Fee-Adjusted Returns 2	10.12	21.69	8.46	8,817,517
MSCI All Country World Index ex USA	17.12	24.52	10.63	10,128,954
MSCI EAFE Index	11.17	21.59	8.40	8,783,938

 

 

Cumulative Returns of ETF Shares: July 20, 2007–December 31, 2007
		Final Value of
	Since	a $10,000
	Inception 1	Investment
Europe Pacific ETF Shares Market Price	–2.19%	$9,781
Europe Pacific ETF Shares Net Asset Value	–2.02	9,798
MSCI EAFE Index	–2.12	9,788

 

 

Fiscal-Year Total Returns (%): August 17, 1999–December 31, 2007

 

 

 

 

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the following inception dates: January 4, 2001, for Institutional Shares; July 20, 2007, for ETF Shares.

2 Reflective of the 1% fee assessed on redemptions of shares held in the fund for less than five years.

Note: See Financial Highlights tables on pages 52–54 for dividend and capital gains information.

 

 

54

Tax-Managed International Fund

 

Financial Statements

 

The Statement of Net Assets —an integral part of the Financial Statements for Vanguard Tax-Managed International Fund—is included as an insert to this report.

 

Statement of Operations

 

 

	Year Ended
	December 31, 2007
	($000)
Investment Income
Income
Dividends 1	68,177
Interest 2	135
Total Income	68,312
Expenses
The Vanguard Group—Note B
Investment Advisory Services	128
Management and Administrative—Investor Shares	1,802
Management and Administrative—Institutional Shares	144
Management and Administrative—ETF Shares	127
Marketing and Distribution—Investor Shares	293
Marketing and Distribution—Institutional Shares	56
Marketing and Distribution—ETF Shares	11
Custodian Fees	644
Auditing Fees	29
Shareholders’ Reports—Investor Shares	20
Shareholders’ Reports—Institutional Shares	—
Shareholders’ Reports—ETF Shares	—
Trustees’ Fees and Expenses	3
Total Expenses	3,257
Net Investment Income	65,055
Realized Net Gain (Loss)
Investment Securities Sold	25,376
Foreign Currencies	600
Realized Net Gain (Loss)	25,976
Change in Unrealized Appreciation (Depreciation)
Investment Securities	125,654
Foreign Currencies	(11)
Change in Unrealized Appreciation (Depreciation)	125,643
Net Increase (Decrease) in Net Assets Resulting from Operations	216,674

 

 

 

 

 

1 Dividends are net of foreign withholding taxes of $5,047,000.

2 Interest income from an affiliated company of the fund was $111,000.

 

 

55

Tax-Managed International Fund

 

Statement of Changes in Net Assets

 

	Year Ended December 31,
	2007	2006
	($000)	($000)
Increase (Decrease) in Net Assets
Operations
Net Investment Income	65,055	43,196
Realized Net Gain (Loss)	25,976	6,699
Change in Unrealized Appreciation (Depreciation)	125,643	322,660
Net Increase (Decrease) in Net Assets Resulting from Operations	216,674	372,555
Distributions
Net Investment Income
Investor Shares	(40,939)	(37,760)
Institutional Shares	(12,416)	(6,145)
ETF Shares	(12,799)	—
Realized Capital Gain
Investor Shares	—	—
Institutional Shares	—	—
ETF Shares	—	—
Total Distributions	(66,154)	(43,905)
Capital Share Transactions—Note E
Investor Shares	140,426	223,171
Institutional Shares	293,768	18,341
ETF Shares	669,001	—
Net Increase (Decrease) from Capital Share Transactions	1,103,195	241,512
Total Increase (Decrease)	1,253,715	570,162
Net Assets
Beginning of Period	1,882,621	1,312,459
End of Period 1	3,136,336	1,882,621

 

 

 

 

 

 

 

 

 

 

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($679,000) and ($559,000).

 

 

56

Tax-Managed International Fund

 

Financial Highlights

 

Investor Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$14.16	$11.48	$10.33	$8.76	$6.43
Investment Operations
Net Investment Income	.332	.331	.246	.201	.158
Net Realized and Unrealized Gain (Loss)
on Investments 1	1.244	2.685	1.161	1.571	2.325
Total from Investment Operations	1.576	3.016	1.407	1.772	2.483
Distributions
Dividends from Net Investment Income	(.336)	(.336)	(.257)	(.202)	(.153)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.336)	(.336)	(.257)	(.202)	(.153)
Net Asset Value, End of Period	$15.40	$14.16	$11.48	$10.33	$8.76
Total Return 2	11.15%	26.27%	13.60%	20.25%	38.67%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$1,915	$1,624	$1,119	$825	$514
Ratio of Total Expenses to
Average Net Assets	0.15%	0.20%	0.20%	0.23%	0.28%
Ratio of Net Investment Income to
Average Net Assets	2.71%	2.70%	2.50%	2.34%	2.33%
Portfolio Turnover Rate	6%	4%	5%	5%	9%

 

 

 

 

 

 

 

 

 

 

 

1 Includes increases from redemption fees of $.00, $.00, $.00, $.00, and $.01.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years; the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year; or the account service fee that may be applicable to certain accounts with balances below $10,000.

 

 

57

Tax-Managed International Fund

 

 

Institutional Shares
	Year Ended December 31,
For a Share Outstanding Throughout Each Period	2007	2006	2005	2004	2003
Net Asset Value, Beginning of Period	$14.17	$11.48	$10.33	$8.77	$6.43
Investment Operations
Net Investment Income	.341	.348	.253	.198	.17
Net Realized and Unrealized Gain (Loss)
on Investments 1	1.244	2.685	1.161	1.571	2.33
Total from Investment Operations	1.585	3.033	1.414	1.769	2.50
Distributions
Dividends from Net Investment Income	(.345)	(.343)	(.264)	(.209)	(.16)
Distributions from Realized Capital Gains	—	—	—	—	—
Total Distributions	(.345)	(.343)	(.264)	(.209)	(.16)
Net Asset Value, End of Period	$15.41	$14.17	$11.48	$10.33	$8.77
Total Return 2	11.21%	26.42%	13.66%	20.19%	38.94%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$568	$258	$193	$143	$102
Ratio of Total Expenses to
Average Net Assets	0.09%	0.14%	0.14%	0.15%	0.17%
Ratio of Net Investment Income to
Average Net Assets	2.77%	2.76%	2.56%	2.42%	2.44%
Portfolio Turnover Rate	6%	4%	5%	5%	9%

 

 

 

 

 

 

 

 

 

 

 

 

1 Includes increases from redemption fees of $.00, $.00, $.00, $.00, and $.00.

2 Total returns do not reflect the 1% redemption fee on shares held less than five years or the 2% redemption fee assessed prior to September 14, 2005, on shares held less than one year.

 

 

58

Tax-Managed International Fund

 

 

Europe Pacific ETF
	July 20,
	2007 1 to
	Dec. 31,
For a Share Outstanding Throughout The Period	2007
Net Asset Value, Beginning of Period	$49.99
Investment Operations
Net Investment Income	.204
Net Realized and Unrealized Gain (Loss) on Investments	(1.219)
Total from Investment Operations	(1.015)
Distributions
Dividends from Net Investment Income	(1.055)
Distributions from Realized Capital Gains	—
Total Distributions	(1.055)
Net Asset Value, End of Period	$47.92
Total Return	–2.02%
Ratios/Supplemental Data
Net Assets, End of Period (Millions)	$653
Ratio of Total Expenses to Average Net Assets	0.12%*
Ratio of Net Investment Income to Average Net Assets	2.74%*
Portfolio Turnover Rate	6%

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Inception.

* Annualized.

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

 

 

59

Tax-Managed International Fund

 

Notes to Financial Statements

 

Vanguard Tax-Managed International Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers three classes of shares: Investor Shares, Institutional Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million. ETF Shares, known as Vanguard Europe Pacific ETF Shares, were first issued on July 20, 2007, and offered to the public on July 26, 2007. ETF Shares are listed for trading on the American Stock Exchange; they can be purchased and sold through a broker. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of United States corporations.

 

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

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value.

 

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

 

3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements.

 

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

 

5. 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. 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

 

60

Tax-Managed International 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. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At December 31, 2007, the fund had contributed capital of $257,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.26% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. 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 year ended December 31, 2007, the fund realized net foreign currency gains of $600,000, which increased distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized losses to overdistributed net investment income. Certain of the fund’s investments are in securities considered to be “passive foreign investment companies,” for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended December 31, 2007, the fund realized gains on the sale of passive foreign investment companies of $379,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to overdistributed net investment income.

 

For tax purposes, at December 31, 2007, the fund had $1,005,000 of ordinary income available for distribution. The fund had available realized losses of $46,773,000 to offset future net capital gains of $12,748,000 through December 31, 2010, $27,239,000 through December 31, 2011, $5,174,000 through December 31, 2012, and $1,612,000 through December 31, 2016.

 

At December 31, 2007, the cost of investment securities for tax purposes was $2,384,853,000. Net unrealized appreciation of investment securities for tax purposes was $754,891,000, consisting of unrealized gains of $800,961,000 on securities that had risen in value since their purchase and $46,070,000 in unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended December 31, 2007, the fund purchased $1,245,106,000 of investment securities and sold $141,311,000 of investment securities, other than temporary cash investments.

 

61

Tax-Managed International Fund

 

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

 

 

	Year Ended December 31,
		2007		2006
	Amount	Shares	Amount	Shares
	($000)	(000)	($000)	(000)
Investor Shares
Issued	320,908	21,093	251,022	19,618
Issued in Lieu of Cash Distributions	32,485	2,130	30,239	2,133
Redeemed 1	(212,967)	(13,611)	(58,090)	(4,528)
Net Increase (Decrease)—Investor Shares	140,426	9,612	223,171	17,223
Institutional Shares
Issued	290,944	18,477	15,987	1,240
Issued in Lieu of Cash Distributions	9,670	633	4,453	314
Redeemed 1	(6,846)	(437)	(2,099)	(156)
Net Increase (Decrease)—Institutional Shares	293,768	18,673	18,341	1,398
ETF Shares
Issued	669,001	13,635	—	—
Issued in Lieu of Cash Distributions	—	—	—	—
Redeemed 1	—	—	—	—
Net Increase (Decrease)—ETF Shares	669,001	13,635	—	—

 

 

F. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax-return positions in financial statements, effective for the fund’s current fiscal year. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2004–2007) for purposes of implementing FIN 48, and has concluded that no provision for income tax is required in the fund’s financial statements.

 

 

 

 

 

 

 

 

 

1 Net of redemption fees for 2007 and 2006 of $473,000 and $290,000, respectively (fund totals).

 

 

62

Report of Independent Registered Public Accounting Firm

 

To the Trustees of Vanguard Tax-Managed Funds and the Shareholders of Vanguard Tax-Managed Balanced Fund, Vanguard Tax-Managed Growth and Income Fund, Vanguard Tax-Managed Capital Appreciation Fund, Vanguard Tax-Managed Small-Cap Fund, and Vanguard Tax-Managed International Fund:

 

In our opinion, the statements of net assets appearing in the insert to this annual report and the accompanying related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Tax-Managed Balanced Fund, Vanguard Tax-Managed Growth and Income Fund, Vanguard Tax-Managed Capital Appreciation Fund, Vanguard Tax-Managed Small-Cap Fund, and Vanguard Tax-Managed International Fund (constituting separate portfolios of Vanguard Tax-Managed Funds, hereafter referred to as the “Funds”) at December 31, 2007, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2007 by correspondence with the custodian and by agreement to the underlying ownership records for Vanguard REIT Fund, provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

 

February 8, 2008

 

 

 

 

 

 

 

 

 

 

63

 

Special 2007 tax information (unaudited) for Vanguard Tax Managed Funds

 

This information for the fiscal year ended December 31, 2007, is included pursuant to provisions of the Internal Revenue Code.

 

The Tax-Managed Balanced Fund designates 73.38% of its income dividends as exempt-interest dividends.

 

The funds distributed qualified dividend income to shareholders during the fiscal year as follows:

 

 

	Qualified Dividend Income
Tax-Managed Fund	($000)
Balanced	5,385
Growth and Income	60,680
Capital Appreciation	67,564
Small-Cap	17,730
International	66,154

 

 

For corporate shareholders, the percentage of investment income (dividend income plus short-term gains, if any) that qualifies for the dividends-received deduction is as follows:

 

 

Tax-Managed Fund	Percentage
Balanced	100% 1
Growth and Income	100
Capital Appreciation	100
Small-Cap	94

 

 

The Tax-Managed International Fund passed through to shareholders foreign source income of $73,217,000 and foreign taxes paid of $5,041,000. The pass-through of foreign taxes paid will affect only shareholders on the dividend record date in December 2007. Shareholders received more detailed information along with their Form 1099-DIV in January 2008.

 

 

 

 

 

 

1 The percentage applies only to the taxable ordinary income that has been reported on Form 1099-DIV.

 

 

64

Your Fund’s After-Tax Returns

 

The table on page 61 presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

 

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

 

The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

 

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65

Average Annual Total Returns: 1
Periods Ended December 31, 2007
	One	Five	Ten
	Year	Years	Years 2
Tax-Managed Balanced Fund
Returns Before Taxes	4.09%	8.55%	6.15%
Returns After Taxes on Distributions	3.97	8.44	6.02
Returns After Taxes on Distributions and Sale of Fund Shares	3.58	7.71	5.62
Tax-Managed Growth and Income Fund Investor Shares
Returns Before Taxes	4.35%	12.75%	5.91%
Returns After Taxes on Distributions	4.07	12.45	5.52
Returns After Taxes on Distributions and Sale of Fund Shares	3.21	11.13	4.99
Tax-Managed Capital Appreciation Fund Investor Shares
Returns Before Taxes	5.03%	13.93%	6.68%
Returns After Taxes on Distributions	4.79	13.72	6.46
Returns After Taxes on Distributions and Sale of Fund Shares	3.58	12.22	5.79
Tax-Managed Small-Cap Fund Investor Shares
Returns Before Taxes	–0.49%	16.03%	12.08%
Returns After Taxes on Distributions	–0.62	15.89	11.89
Returns After Taxes on Distributions and Sale of Fund Shares	–0.14	14.13	10.71
Tax-Managed International Fund Investor Shares
Returns Before Taxes	10.07%	21.60%	7.28%
Returns After Taxes on Distributions	9.85	21.37	6.95
Returns After Taxes on Distributions and Sale of Fund Shares	7.16	19.31	6.28

 

 

 

 

 

 

 

 

 

 

1 All fund returns are adjusted to reflect fees. Each of the Vanguard Tax-Managed Funds assesses a 1% fee on redemptions of shares held in the fund for less than five years. Total returns do not reflect the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Since inception for the Tax-Managed Small-Cap Fund (March 25, 1999) and the Tax-Managed International Fund (August 17, 1999).

 

 

66

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 table on page 63 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 the 1% fee on redemptions of shares held for less than five years, nor do they include the account service fee described in the 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.

 

 

 

67

 

Six Months Ended December 31, 2007 1
	Beginning	Ending	Expenses
	Account Value	Account Value	Paid During
Tax-Managed Fund	6/30/2007	12/31/2007	Period 2
Based on Actual Fund Return
Balanced	$1,000.00	$1,013.03	$0.61
Growth and Income
Investor Shares	$1,000.00	$985.98	$0.75
Admiral Shares	1,000.00	986.35	0.40
Institutional Shares	1,000.00	986.37	0.35
Capital Appreciation
Investor Shares	$1,000.00	$983.82	$0.75
Admiral Shares	1,000.00	984.09	0.40
Institutional Shares	1,000.00	984.12	0.35
Small-Cap
Investor Shares	$1,000.00	$925.07	$0.63
Institutional Shares	1,000.00	924.94	0.44
International
Investor Shares	$1,000.00	$1,002.17	$0.66
Institutional Shares	1,000.00	1,002.11	0.35
Based on Hypothetical 5% Return
Balanced	$1,000.00	$1,024.60	$0.61
Growth and Income
Investor Shares	$1,000.00	$1,024.45	$0.77
Admiral Shares	1,000.00	1,024.80	0.41
Institutional Shares	1,000.00	1,024.85	0.36
Capital Appreciation
Investor Shares	$1,000.00	$1,024.45	$0.77
Admiral Shares	1,000.00	1,024.80	0.41
Institutional Shares	1,000.00	1,024.85	0.36
Small-Cap
Investor Shares	$1,000.00	$1,024.55	$0.66
Institutional Shares	1,000.00	1,024.75	0.46
International
Investor Shares	$1,000.00	$1,024.55	$0.66
Institutional Shares	1,000.00	1,024.85	0.36

 

 

 

 

1 This table does not include data for the Tax-Managed International Fund’s ETF Shares, which have fewer than six months of history.

2 The calculations are based on expenses incurred during the most recent six-month period. The funds’ annualized six-month expense ratios for that period are: for the Tax-Managed Balanced Fund, 0.12%; for the Tax-Managed Growth and Income Fund, 0.15% for Investor Shares, 0.08% for Admiral Shares, and 0.07% for Institutional Shares; for the Tax-Managed Capital Appreciation Fund, 0.15% for Investor Shares, 0.08% for Admiral Shares, and 0.07% for Institutional Shares; for the Tax-Managed Small-Cap Fund, 0.13% for Investor Shares and 0.09% for Institutional Shares; for the Tax-Managed International Fund, 0.13% for Investor 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.

 

 

68

Glossary

 

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.

 

Average Quality. An indicator of credit risk, this figure is the average of the ratings assigned to a fund’s fixed income holdings by credit-rating agencies. The agencies make their judgment after appraising an issuer’s ability to meet its obligations. Quality is graded on a scale, with Aaa or AAA indicating the most creditworthy bond issuers. U.S. Treasury securities are considered to have the highest credit quality.

 

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%. A fund’s beta should be reviewed in conjunction with its R-squared (see definition on the next page). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

 

Dividend Yield. 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.

 

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. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.

 

Foreign Holdings. The percentage of a fund represented by stocks 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.

 

Largest State Concentrations. An indicator of diversification. The less concentrated a fund’s holdings of bonds, the less the fund will be hurt by any financial problems in a single state or region.

 

69

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.

 

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. A snapshot of a fund’s income from interest and dividends. The yield, expressed as a percentage of the fund’s net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of income provided by securities in the index.

 

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.

 

 

 

70

 

 

 

 

 

 

 

 

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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.

 

Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members’ responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers.

 

Each trustee serves a fund until its termination; or until the trustee’s retirement, resignation, or death; or otherwise as specified in the fund’s organizational documents. Any trustee may be removed at a shareholders’ meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

 

Chairman of the Board, Chief Executive Officer, and Trustee
John J. Brennan 1
Born 1954	Principal Occupation(s) During the Past Five Years: Chairman of the Board, Chief Executive
Trustee since May 1987;	Officer, and Director/Trustee of The Vanguard Group, Inc., and of each of the investment
Chairman of the Board and	companies served by The Vanguard Group.
Chief Executive Officer
152 Vanguard Funds Overseen
Independent Trustees
Charles D. Ellis
Born 1937	Principal Occupation(s) During the Past Five Years: Applecore Partners (pro bono ventures
Trustee since January 2001	in education); Senior Advisor to Greenwich Associates (international business strategy
152 Vanguard Funds Overseen	consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business
	at New York University; Trustee of the Whitehead Institute for Biomedical Research.
Rajiv L. Gupta
Born 1945	Principal Occupation(s) During the Past Five Years: Chairman, President, and
Trustee since December 2001 2	Chief Executive Officer of Rohm and Haas Co. (chemicals); Board Member of
152 Vanguard Funds Overseen	the American Chemistry Council; Director of Tyco International, Ltd. (diversified
	manufacturing and services) since 2005; Trustee of Drexel University and of the
	Chemical Heritage Foundation.
Amy Gutmann
Born 1949	Principal Occupation(s) During the Past Five Years: President of the University of
Trustee since June 2006	Pennsylvania since 2004; Professor in the School of Arts and Sciences, Annenberg School
152 Vanguard Funds Overseen	for Communication, and Graduate School of Education of the University of Pennsylvania
	since 2004; Provost (2001–2004) and Laurance S. Rockefeller Professor of Politics and
	the University Center for Human Values (1990–2004), Princeton University; Director of
	Carnegie Corporation of New York since 2005 and of Schuylkill River Development
	Corporation and Greater Philadelphia Chamber of Commerce since 2004.

 

JoAnn Heffernan Heisen
Born 1950	Principal Occupation(s) During the Past Five Years: Corporate Vice President and
Trustee since July 1998	Chief Global Diversity Officer since 2006, Vice President and Chief Information
152 Vanguard Funds Overseen	Officer (1997–2005), and Member of the Executive Committee of Johnson &
	Johnson (pharmaceuticals/consumer products); Director of the University Medical
	Center at Princeton and Women’s Research and Education Institute.
André F. Perold
Born 1952	Principal Occupation(s) During the Past Five Years: George Gund Professor of Finance
Trustee since December 2004	and Banking, Harvard Business School; Senior Associate Dean, Director of Faculty
152 Vanguard Funds Overseen	Recruiting, and Chair of Finance Faculty, Harvard Business School; Director and Chairman
	of UNX, Inc. (equities trading firm) since 2003; Chair of the Investment Committee of
	HighVista Strategies LLC (private investment firm) since 2005.
Alfred M. Rankin, Jr.
Born 1941	Principal Occupation(s) During the Past Five Years: Chairman, President, Chief Executive
Trustee since January 1993	Officer, and Director of NACCO Industries, Inc. (forklift trucks/housewares/lignite); Director
152 Vanguard Funds Overseen	of Goodrich Corporation (industrial products/aircraft systems and services).
J. Lawrence Wilson
Born 1936	Principal Occupation(s) During the Past Five Years: Retired Chairman and Chief Executive
Trustee since April 1985	Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines) and
152 Vanguard Funds Overseen	AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University
	and of Culver Educational Foundation.
Executive Officers 1
Thomas J. Higgins
Born 1957	Principal Occupation(s) During the Past Five Years: Principal of The Vanguard Group, Inc.;
Treasurer since July 1998	Treasurer of each of the investment companies served by The Vanguard Group.
152 Vanguard Funds Overseen
Heidi Stam
Born 1956	Principal Occupation(s) During the Past Five Years: Managing Director of The Vanguard
Secretary since July 2005	Group, Inc., since 2006; General Counsel of The Vanguard Group since 2005; Secretary of
152 Vanguard Funds Overseen	The Vanguard Group, and of each of the investment companies served by The Vanguard
	Group, since 2005; Principal of The Vanguard Group (1997–2006).

 

Vanguard Senior Management Team
R. Gregory Barton	Kathleen C. Gubanich	F. William McNabb, III	Ralph K. Packard
Mortimer J. Buckley	Paul A. Heller	Michael S. Miller	George U. Sauter

 

Founder

John C. Bogle

Chairman and Chief Executive Officer, 1974–1996

 

 

1 Officers of the funds are “interested persons” as defined in the Investment Company Act of 1940.

2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.

More information about the trustees is in the Statement of Additional Information , available from The Vanguard Group.

 

	P.O. Box 2600
	Valley Forge, PA 19482-2600

 

Connect with Vanguard® > www.vanguard.com

 

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	All comparative mutual fund data are from Lipper Inc.
	or Morningstar, Inc., unless otherwise noted.
	You can obtain a free copy of Vanguard’s proxy voting
This material may be used in conjunction
	guidelines by visiting our website, www.vanguard.com,
with the offering of shares of any Vanguard
	and searching for “proxy voting guidelines,” or by
fund only if preceded or accompanied by	calling Vanguard at 800-662-2739. The guidelines are
the fund’s current prospectus.	also available from the SEC’s website, www.sec.gov.
	In addition, you may obtain a free report on how your
	fund voted the proxies for securities it owned during
	the 12 months ended June 30. To get the report, visit
	either www.vanguard.com or www.sec.gov.
	You can review and copy information about your fund
	at the SEC’s Public Reference Room in Washington, D.C.
	To find out more about this public service, call the SEC
	at 202-551-8090. Information about your fund is also
	available on the SEC’s website, and you can receive
	copies of this information, for a fee, by sending a
	request in either of two ways: via e-mail addressed to
	publicinfo@sec.gov or via regular mail addressed to the
	Public Reference Section, Securities and Exchange
	Commission, Washington, DC 20549-0102.
	© 2008 The Vanguard Group, Inc.
	All rights reserved.
	Vanguard Marketing Corporation, Distributor.
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