· 2017-09-14* figures for the average comparable funds are compiled by lipper, inc. the lipper...

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0000893220-99-000267.txt : 199903020000893220-99-000267.hdr.sgml : 19990302ACCESSION NUMBER:0000893220-99-000267CONFORMED SUBMISSION TYPE:N-30DPUBLIC DOCUMENT COUNT:1CONFORMED PERIOD OF REPORT:19981231FILED AS OF DATE:19990301

FILER:

COMPANY DATA:COMPANY CONFORMED NAME:VANGUARD INDEX TRUSTCENTRAL INDEX KEY:0000036405STANDARD INDUSTRIAL CLASSIFICATION: []IRS NUMBER:231999755FISCAL YEAR END:1231

FILING VALUES:FORM TYPE:N-30DSEC ACT:SEC FILE NUMBER:811-02652FILM NUMBER:99553327

BUSINESS ADDRESS:STREET 1:PO BOX 2600STREET 2:VM #V34CITY:VALLEY FORGESTATE:PAZIP:19482BUSINESS PHONE:6106696289

FORMER COMPANY:FORMER CONFORMED NAME:FIRST INDEX INVESTMENT TRUSTDATE OF NAME CHANGE:19800904

N-30D1FORM N-30D US STOCK INDEX FUNDS

1VANGUARD U.S. STOCKINDEX FUNDSLARGE-CAPITALIZATION PORTFOLIOS

VANGUARD 500 INDEX FUNDVANGUARD GROWTH INDEX FUNDVANGUARD VALUE INDEX FUNDVANGUARD TOTAL STOCK MARKET INDEX FUND

[PHOTO]

ANNUALREPORTDECEMBER 31, 1998

[THE VANGUARD GROUP LOGO] 2

AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS.

Our 8,000 crew members embrace the traditional values on which our success isbuilt, including integrity, hard work, thrift, teamwork, and fair dealing onbehalf of our clients.

This year, our report cover pays homage to three anniversaries, each of greatsignificance to The Vanguard Group:

- - The 200th anniversary of the Battle of the Nile, which commenced on August 1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our namesake. And its motto-- "Leading the way"--serves as a guiding principle for our company.

- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to shape the standards and business principles that Mr. Bogle laid down for Vanguard at its beginning nearly 25 years ago: a stress on balanced, diversified investments; insistence on fair dealing and candor with clients; and a focus on long-term investing. To our great regret, Mr. Morgan died on September 2.

- - The 70th anniversary, on December 28, of the incorporation of Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund, and one of only a handful of funds created in the 1920s that are still in operation.

Although Vanguard constantly tackles new challenges, adopts new technology, anddevelops new services, we treasure the traditions and values that set us apartin a crowded, competitive industry. And we salute our shareholders, whosesupport and trust we strive to earn each and every day.

[PHOTO]

CONTENTS

A MESSAGE TO OUR SHAREHOLDERS

1

THE MARKETS IN PERSPECTIVE

7

PERFORMANCE SUMMARIES

9

FUND PROFILES

16

FINANCIAL STATEMENTS

21

REPORT OF INDEPENDENT ACCOUNTANTS

39

All comparative mutual fund data are from Lipper or Morningstar, unless otherwise noted.

3FELLOW SHAREHOLDER,

[PHOTO] [PHOTO]John J. Brennan John C. BogleChairman & Ceo Senior Chairman

Large-capitalization U.S. stocks continued their astounding surge during1998--despite encountering a severe, yet brief, downturn in the summer. Duringthe twelve months ended December 31, 1998, the four Vanguard large-cap stockindex funds earned returns ranging from +14.6% to a spectacular +42.2%. Eachprovided a close or exact match with its respective unmanaged benchmark index.The returns of three of the four funds outpaced those of comparable mutual fundsby wide margins, while our Value Index Fund fell modestly short of its averagepeer.

- --------------------------------------------------------- TOTAL RETURNS YEAR ENDED DECEMBER 31, 1998- --------------------------------------------------------- 500 INDEX FUND +28.6%S&P 500 Index +28.6- ---------------------------------------------------------GROWTH INDEX FUND +42.2%S&P/BARRA Growth Index +42.2- ---------------------------------------------------------VALUE INDEX FUND +14.6%S&P/BARRA Value Index +14.7- ---------------------------------------------------------TOTAL STOCK MARKET INDEX FUND +23.3%Wilshire 5000 Equity Index +23.4- ---------------------------------------------------------

The +28.6% return of our flagship 500 Index Fund in 1998 equaled the returnof the Standard & Poor's 500 Composite Stock Price Index and topped the returnsof more than 83% of all general equity mutual funds during the year, furtherburnishing the fund's terrific long-term record versus actively managed funds.The +23.3% return of our Total Stock Market Index Fund, which provides exposureto the entire U.S. stock market, surpassed the returns of about seven out of tengeneral equity funds.

The adjacent table shows the twelve-month total returns (capital change plusreinvested dividends) achieved by our four large-cap index funds, compared withthe returns of their respective unmanaged index benchmarks. Per-share figuresfor each fund, including net asset values, income dividends, and capital gainsdistributions, are presented in the table that follows this letter.

During 1998, we introduced Institutional Shares for our Growth and ValueIndex Funds. These shares are available for minimum investments of $10 million.(Institutional shares for our Total Stock Market Fund were introduced in July1997.) From their May 14, 1998, inception through December 31, 1998, theInstitutional Shares of our Growth Index Fund returned +20.8%, slightlyoutpacing the +20.6% gain of the S&P/BARRA Growth Index. The +0.7% return of theValue Index Fund's Institutional Shares from inception on July 2, 1998, throughyear-end was a hair higher than that of its unmanaged benchmark. TheInstitutional Shares of the Total Stock Market Index Fund returned +23.4% forthe year, exactly matching the return of the Wilshire 5000 Equity Index.

FINANCIAL MARKETS IN REVIEW

The U.S. economy grew at a robust pace--more than 3%--during 1998 as it shruggedoff the effects of serious financial problems in Asia, Russia, and LatinAmerica. Troubles abroad slowed demand for American exports and boosted demandfor imported goods, widening the U.S. trade deficit. But the domestic economygot a powerful push from higher consumer spending, which was encouraged by lowunemployment (4.3% at year-end) and higher wages (up about 4%, well above the1.6% inflation rate).

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The optimism that kept shopping malls and automobile showrooms busy was alsoa factor in the financial markets. Stock prices shot up during the first half ofthe year, despite news that corporate earnings actually dipped slightly, and byJuly 17 the S&P 500 Index had gained 23.3%. But fears that Asia's financialtroubles were spreading worldwide touched off a sharp decline: Over thefollowing six weeks, the S&P 500 Index fell -19.2%. Declines were much steeperfor smaller stocks: The Russell 2000 Index of small-cap stocks fell nearly -40%from its mid-April peak to its low in October.

The stock market then revived with remarkable speed and vigor. By year-end,the S&P 500 Index was again in record territory, having gained +28.6% for theyear. This result, however, masked weakness elsewhere in the market. TheWilshire 4500 Equity Index, which comprises stocks not included in the S&P 500,gained just +8.6%, while the small-cap Russell 2000 Index declined -2.5%. In theentire market, more stocks declined in price than rose. Among large-cap stocks,there was a huge gap between returns on growth and value stocks: The S&P 500'sgrowth component gained +42.2% during the year, nearly three times the +14.7%return on its value stocks.

Interest rates declined on balance during 1998. Bond prices, which move inthe opposite direction from interest rates, generally rose. Price appreciationaccounted for 2 percentage points of the 8.7% total return of the LehmanBrothers Aggregate Bond Index. Rates fell furthest--roughly 1 percentagepoint--for U.S. Treasury securities, whose prices benefited from a "flight toquality" as many investors shunned riskier securities.

1998 PERFORMANCE OVERVIEW

During 1998, the returns of our 500, Growth, and Total Stock Market Index Fundswere far better than those of their average peers, while the Value Index Fundfell about 2 percentage points short of its average peer.

The VANGUARD 500 INDEX FUND continued its dominance over actively managedequity mutual funds in 1998, earning a total return that was nearly double the+14.5% return of the average general equity mutual fund, which holds a largershare of mid- and small-cap stocks. Within the S&P 500 Index, stocks of bigtechnology companies were, by far, the market leaders during 1998, gaining +83%.Other sectors also notched excellent results, notably health-care and utilities,both of which were up more than +40% for the year. The story was different forcompanies in the materials & processing sector (-1%) and the producer-durablesgroups (+2%). By far the worst return came from the "other energy" sector(-36%), which includes drilling and mining companies that were hurt by lower oilprices.

The companies in the S&P 500 Index account for more than 75% of the marketcapitalization of our TOTAL STOCK MARKET INDEX FUND, which accordingly also hada strong year. It earned a total return of +23.3% and outpaced the averagegeneral equity mutual fund by 8.8 percentage points.

We'll take this opportunity to stress that the S&P 500 Index is not theideal measure of the performance of the entire U.S. stock market. Theextraordinary returns achieved by the biggest U.S. stocks may have temptedinvestors to devote an ever larger share of their portfolios to the S&P 500. Butwhile it is a good proxy for large stocks, the S&P 500 excludes some 6,700companies whose stocks account for about 25% of the market's totalcapitalization. As such, investors seeking to build a well-diversifiedinvestment program should venture beyond the S&P 500 and consider rounding outtheir portfolios with smaller stocks, international stocks, and bonds inproportions suitable to their objectives, investing time horizon, andtemperament for risk.

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The striking disparity between the returns of value and growth stocks during1998 played an important role in both the absolute and relative returns of ourGrowth and Value Index Funds. The +42.2% return of the GROWTH INDEX FUNDexceeded that of the average growth mutual fund by 19.3 percentage points.Meanwhile, the +14.6% return of the Value Index Fund fell short of the averagevalue mutual fund by 2.4 percentage points. In both cases, our performancerelative to similar funds can be explained by the tremendous strength of growthstocks. Simply, our Growth Index Fund holds a bigger share of very large, growthstocks than its average competitor, and the VALUE INDEX FUND holds a smallerstake in large growth stocks than its average peer.

- ------------------------------------------------------------------ TOTAL RETURNS YEAR ENDED DECEMBER 31, 1998 --------------------------------------- AVERAGE VANGUARD COMPARABLEU.S. STOCK INDEX FUND FUND FUND* DIFFERENCE- ------------------------------------------------------------------ 500 +28.6% +14.5% +14.1%Growth +42.2 +22.9 +19.3Value +14.6 +17.0 - 2.4Total Stock Market +23.3 +14.5 + 8.8- ------------------------------------------------------------------

* Figures for the average comparable funds are compiled by Lipper, Inc. The Lipper fund groups are: for the 500 and Total Stock Market Index Funds, general equity funds; for the Growth Index Fund, growth funds; for the Value Index Fund, value funds.

As we have explained in previous reports, the returns of value stocks andgrowth stocks often diverge, although the difference in returns is rarely solarge as the value shortfall of nearly 28 percentage points during the pasttwelve months. We note that it wasn't too many years ago when growth was thelaggard. During 1993, the S&P 500 Index's value stocks gained +18.6%, versus+1.7% for the index's growth stocks. There's no reason to expect that themarket's favor has tilted permanently to growth stocks, though we wouldn'thazard to guess when value stocks might take the market lead. A prudent investorshould expect that, despite the year-to-year divergences, long-term returns ofgrowth stocks and value stocks will probably be similar. The table abovepresents the 1998 returns of each of our large-cap index funds and compares themwith those of their average peers.

Vanguard Core Management Group deserves credit for the fine job of keepingour funds so closely in line with their respective unmanaged benchmark indexes.Our funds incur the transaction costs of investing substantial amounts of cash,and also must pay operating expenses (albeit at an extremely low level) that theindex does not. These costs are hurdles that we must overcome for our funds toaccurately track the performance of their respective indexes. In 1998, VanguardCore Management's trading efficiencies and strategies actually negated most ofthese costs. For the year, our 500 and Growth Index Funds exactly matched theirtargets while our Value and Total Stock Market Index Funds fell a tiny bit short(0.1 percentage point).

Our low expenses also aid us in the quest to provide returns that surpassthose of similar funds. For 1998, the 500 Index Fund had an expense ratio(annual expenses as a percentage of average net assets) of 0.18%, a fraction ofthe 1.45% charged by the average general equity mutual fund. The expense ratioof our Growth Index Fund was 0.22%; Value Index, 0.22%; and Total Stock MarketIndex, 0.20%. For mutual fund shareholders, the cost equation is a simple one:the lower the expenses, the less that is deducted from a fund's gross return.Returns, of course, are not predictable, but costs are. Therefore, we believethat our cost advantage is sustainable, regardless of the direction of thefinancial markets.

A review of 1998 would not be complete without a reminder that as far aslarge-cap stocks are concerned, it doesn't get much better than this. Suchoutstanding returns for a single year are remarkable enough. But for large-capstocks to register a fourth straight

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year of 20%-plus returns is unprecedented. It's important to remember thatdifferent segments of the financial markets outperform from time to time.Smaller stocks, which have been outshone by large stocks over the past severalyears, have had their day in the past and certainly will in the future.

LONG-TERM PERFORMANCE OVERVIEW

The table below presents a longer-term look at the performance of Vanguard 500Index Fund. It provides annualized returns for our fund, the average activelymanaged stock mutual fund, and the S&P 500 Index over the past decade. It alsocompares the growth of hypothetical $10,000 investments made in each at thebeginning of 1989, assuming that income dividends and capital gainsdistributions were reinvested. The difference between our 500 Index Fund and itsaverage peer is astounding. Over the past decade, a $10,000 investment in the500 Fund would have grown to $57,147, compared with $42,342 in the averagegeneral equity fund. This advantage is equal to $14,805--nearly 11/2 times theinitial investment! Our tiny shortfall versus the S&P 500 Index is accounted forentirely by our expense ratio.

- --------------------------------------------------------------------- TOTAL RETURNS 10 YEARS ENDED DECEMBER 31, 1998 -------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RATE INITIAL INVESTMENT- --------------------------------------------------------------------- VANGUARD 500 INDEX FUND +19.0% $57,147Average General Equity Fund +15.5 42,342S&P 500 Index +19.2 57,963- ---------------------------------------------------------------------

The table below presents a similar comparison for our other large-cap stockindex funds. Since their inceptions in 1992, each fund has built a considerableedge over its average peer and has matched up well with its benchmark index.Indeed, the annualized total return of the Growth Index Fund during the periodsurpassed that of the average growth mutual fund by an impressive 5.3 percentagepoints, amassing an advantage of $8,546 on an initial $10,000 investment.

- ------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS SINCE INCEPTION THROUGH DECEMBER 31, 1998* -------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RATE INITIAL INVESTMENT- ------------------------------------------------------------------- GROWTH INDEX FUND +22.9% $35,706Average Growth Fund +17.6 27,160S&P/BARRA Growth Index +23.1 36,061- -------------------------------------------------------------------VALUE INDEX FUND +19.7% 30,245Average Value Fund +17.6 27,089S&P/BARRA Value Index +19.8 30,475- -------------------------------------------------------------------TOTAL STOCK MARKET INDEX FUND +19.2% $32,338Average General Equity Fund +16.3 27,417Wilshire 5000 Equity Index +19.6 32,978- -------------------------------------------------------------------

*For the Growth and Value Index Funds, inception is November 2, 1992; for the Total Stock Market Index Fund, inception is April 27, 1992.

Just as the returns provided by stocks--particularly large-cap stocks--werewell above average in 1998, so too were the returns over the past decade. Thatis sure to change. We are not forecasting a sharp pullback, though one may welloccur. Rather, we are suggesting that a wise investor always be aware that thechance of a stock market decline--whether a sharp, quick plunge or an extendedslump--is ever-present. That's why it's imperative for investors to build aninvestment program upon realistic expectations of future returns rather than anextrapolation of the extraordinary returns of the recent past.

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This is especially true when it comes to expectations for the S&P 500 Index.At year-end the index stood at a historically high price level relative toearnings and several other important measures. However, it cannot--and willnot--continue to rise forever. Investors who ignore this truism of investing doso at their own peril.

IN SUMMARY

Though large-cap stocks achieved solid gains in 1998, the summer's tumultprovided a painful lesson about the risks of investing in equities. It alsoamply demonstrated the advantages of a balanced investment approach. Investorswho held a mix of stock funds, bond funds, and money market funds participatedin the market's bounty but were spared some measure of the anxiety felt duringthe midyear downturn in stocks.

We have always believed that investors are well served by selecting abalanced mix of assets appropriate to their investment time horizon, goals, andrisk tolerance, and then sticking with their plan. The events of 1998 furtherreinforced our belief in balanced investing and in the worth of investing inlow-cost index funds as a means of gaining exposure to the markets.

/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN

John C. Bogle John J. BrennanSenior Chairman Chairman and Chief Executive Officer

January 14, 1999

NOTE: You'll observe that we've made minor changes in the names of the 500 IndexFund, Growth Index Fund, Value Index Fund, and Total Stock Market Index Fund. Wereplaced the word "portfolio" with "fund" and added "index" as part of a broadereffort to simplify the names in our fund lineup.

PORTFOLIO STATISTICS- ----------------------------------------------------------------------------------------------------------------------- PERIOD ENDED DECEMBER 31, 1998 NET ASSET VALUE PER SHARE -------------------------------------------- DECEMBER 31, DISTRIBUTIONS FROM DIVIDENDS PER --------------------------- NET REALIZED SHARE FROM NETU.S. STOCK INDEX FUND 1997 1998 CAPITAL GAINS INVESTMENT INCOME- ----------------------------------------------------------------------------------------------------------------------- 500 $90.07 $113.95 $0.420 $1.330Growth 22.53 31.67 0.115 0.219Value 20.85 22.51 0.990 0.363Total Stock Market 22.64 27.42 0.125 0.329- -----------------------------------------------------------------------------------------------------------------------

INSTITUTIONAL SHARES- -----------------------------------------------------------------------------------------------------------------------Growth $26.49* $31.67 $0.115 $0.187Value 23.22** 22.51 0.610 0.236Total Stock Market 22.64 27.42 0.125 0.352- -----------------------------------------------------------------------------------------------------------------------

*Net asset value as of May 14, 1998.**Net asset value as of July 2, 1998.

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NOTICE TO SHAREHOLDERS

At a special meeting on July 24, 1998, shareholders of Vanguard 500 Index Fund,Vanguard Growth Index Fund, Vanguard Value Index Fund, and Vanguard Total StockMarket Index Fund overwhelmingly approved three proposals. The proposals andvoting results were:

1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce theamount of state taxes paid each year by some Vanguard funds. The Vanguard U.S.Stock Index Funds--which include the 500, Growth, Value, and Total Stock MarketIndex Funds--will not realize any tax savings as a result of the change, but thefunds will benefit from the efficiency of being organized the same way as allother Vanguard funds. Approved by 96.35% of the shares voted, as follows:

- ----------------------------------------------------------------------- FOR AGAINST ABSTAIN- ----------------------------------------------------------------------- 799,176,287 16,745,818 13,498,959- -----------------------------------------------------------------------

2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This changepermits the Stock Index Funds to participate in Vanguard's interfund lendingprogram, which allows funds to loan money to each other if--and only if--itmakes good financial sense to do so on both sides of the transaction. Theinterfund lending program won't be an integral part of the funds' investmentprograms; it is a contingency arrangement for managing unusual cash flows.Approved as follows:

- ------------------------------------------------------------------------------------ INDEX FUND FOR AGAINST ABSTAIN APPROVED BY- ------------------------------------------------------------------------------------ 500 306,696,420 10,094,333 8,372,469 94.32%- ------------------------------------------------------------------------------------ Growth 72,894,056 2,601,317 2,362,185 93.62%- ------------------------------------------------------------------------------------ Value 56,307,839 1,340,822 1,217,958 95.65%- ------------------------------------------------------------------------------------ Total Stock Market 221,971,887 8,721,285 4,762,897 94.27%- ------------------------------------------------------------------------------------

2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. Thischange sets standard limits of 15% of net assets on the amount of moneyVanguard funds can borrow from all sources and on the amount of assets thatcan be pledged to secure any loans. Approved as follows:

- ---------------------------------------------------------------------------------INDEX FUND FOR AGAINST ABSTAIN APPROVED BY- --------------------------------------------------------------------------------- 500 301,269,265 14,889,541 9,004,416 92.65%- ---------------------------------------------------------------------------------Growth 71,742,353 3,553,835 2,561,370 92.15%- ---------------------------------------------------------------------------------Value 55,529,402 2,024,451 1,312,765 94.33%- ---------------------------------------------------------------------------------Total Stock Market 221,217,021 9,572,455 4,666,593 93.95%- ---------------------------------------------------------------------------------

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THE MARKETS IN PERSPECTIVEYEAR ENDED DECEMBER 31, 1998

[PHOTO]

Financial markets continued to produce solid overall gains during 1998. Afterovercoming a sharp, six-week setback in July and August, the S&P 500 Indexgained 28.6% for the year, marking the first time the index had produced returnsof 20% or more in four consecutive years. Bond prices rose as interest ratesgenerally declined over the year. Returns from overseas stock markets variedwidely, with big gains in Europe, small gains in the Pacific, and losses in mostemerging markets.

U.S. STOCK MARKETS

Large-capitalization stocks--especially those of large growth companies--werethe best performers during 1998. The 50 largest stocks within the S&P 500 Indexearned more than 40%, while the return of the other 450 stocks was less than17%. The stock market as a whole, as measured by the Wilshire 5000 Equity Index,earned 23.4%. Small-cap stocks, represented by the Russell 2000 Index, declined2.5% for the year.

The huge gap between returns of large and small stocks was not the onlyoddity during the year. Among large stocks there also was a large disparity inperformance between growth and value stocks. Within the S&P 500 Index, growthstocks rose 42.2%, while value stocks were up 14.7%. The gap of 27.5 percentagepoints is the largest in the 23 years that the growth and value components havebeen tracked.

Stocks rose strongly during the first half of the year. But after hitting athen-record high on July 17, the S&P 500 Index fell by 19.2% during thefollowing six weeks. Declines were steeper for most smaller stocks. The Russell2000 Index fell nearly 40% from its peak in April before climbing back duringthe fourth quarter.

- ---------------------------------------------------------------------------- AVERAGE ANNUALIZED RETURNS PERIODS ENDED DECEMBER 31, 1998 ----------------------------------- 1 YEAR 3 YEARS 5 YEARS- ---------------------------------------------------------------------------- STOCKS S&P 500 Index 28.6% 28.2% 24.1% Russell 2000 Index -2.5 11.6 11.9 MSCI EAFE Index 20.3 9.3 9.5- ----------------------------------------------------------------------------BONDS Lehman Aggregate Bond Index 8.7% 7.3% 7.3% Lehman 10 Year Municipal Bond Index 6.8 6.8 6.4 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 5.1 5.2 5.1- ----------------------------------------------------------------------------OTHER Consumer Price Index 1.6% 2.2% 2.4%- ----------------------------------------------------------------------------

The summer slump in stock prices reflected several factors that raisedanxiety among investors and prompted a reconsideration of risk that extendedpast stocks to bonds. Among these factors were deteriorating corporate earnings;Russia's default on its debts; sharp swings in currency exchange rates; andlingering economic weakness in Asia.

Although these sources of uncertainty remained as the year went on, manyinvestors reacted not by abandoning stocks, but by selecting large, well-knownstocks they perceived as reliable vehicles for long-term growth. The strongrebound in prices during the fourth quarter was due in large part to the calminginfluence on jittery markets of the Federal Reserve Board's decision to cutshort-term interest rates by 0.75 percentage point.

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Technology stocks led the market's advance during 1998, rising 83%.Investors were attracted by rapid revenue growth and a belief that consumers andbusinesses will keep spending freely on computers, software, and computerservices. Speculation also played a role in the surge. Burgeoning activity onthe Internet sent many stocks, even those with no hint of profitability,skyrocketing. The bulge in Internet stock prices prompted comparisons with suchhistoric asset "bubbles" as Japan's stock market in the late 1980s and thetulip-bulb mania in Holland in the 1630s.

Health care and utilities, especially telecommunications providers, alsosoared, achieving returns of more than 43%. Both sectors benefited from risingdemand for their products and a perception that they are somewhat protected fromforeign economic troubles and foreign competition. Consumer-related stocks suchas retailers also did well, reflecting strength in consumer spending. Americansspent almost every after-tax dollar they earned during 1998. Jobs were abundant;unemployment fell to 4.3% by year-end.

The worst-performing groups were two directly harmed by falling commodityprices: oil drilling and services firms in the "other energy" category (-36%)and materials & processing firms (-1%), such as paper, steel, and chemicalmakers. Producer-durables companies, such as machinery and aircraft makers, ekedout a 2% return as companies saw falling sales abroad and rising competition athome from foreign firms.

U.S. BOND MARKETS

The fall in interest rates during 1998 was steepest for U.S. Treasurysecurities, which benefited from heightened aversion to risk among investors andfrom a slight decrease in supply, thanks to a $70 billion federal budgetsurplus. The low inflation rate--consumer prices were up just 1.6%--gave theFederal Reserve the flexibility to cut short-term rates even though economicgrowth was strong.

Yields on long-term Treasury issues fell by roughly 1 percentage point, andthe 30-year Treasury bond's yield was 5.09% on December 31. Lower rates meanhigher bond prices, and the Lehman Brothers Long U.S. Treasury Index earned atotal return of 13.5%, an astounding margin of nearly 12 percentage points overthe inflation rate.

Bonds lacking the unquestioned credit quality of Treasuries did not fare aswell, reflecting a repricing of risk and a "flight to quality" by investors whobegan to feel they had been underestimating risk. One result was price declinesthat nearly offset the interest earned on high-yield "junk" bonds. However,high-quality corporate bonds and mortgage-backed securities generally held upwell. The Lehman Aggregate Bond Index, which encompasses Treasury, mortgage, andhigh-quality corporate securities and has an intermediate-term average maturity,earned a solid 8.7%.

Yields on long-term municipal bonds declined only slightly during the year,and by December 31 were only a tad lower than yields on long-term Treasuries.This was striking because the interest on municipals is exempt from federalincome tax.

INTERNATIONAL STOCK MARKETS

Europe's stock markets beat even the S&P 500 Index's gaudy return, gaining28.7% in U.S.-dollar terms, with about 5% of the gain due to a fall in thedollar versus most European currencies. Pacific-region stocks rose 2.6%,although it took a fall in the dollar's value versus the Japanese yen toovercome losses in local-currency terms. Overall, developed internationalmarkets, as measured by the MSCI EAFE Index, earned 20.3%.

Investors' confidence in emerging markets continued to evaporate in 1998,and stocks in these markets fell about 25% as a group. The few bright spotsincluded South Korea (+141%) and the Philippines (+13%), which had suffered bigdeclines in 1997.

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PERFORMANCE SUMMARY500 INDEX FUND

All of the data on this page represent past performance, which cannot be used topredict future returns that may be achieved by the fund. Note, too, that bothshare price and return can fluctuate widely, so an investment in the fund couldlose money.

TOTAL INVESTMENT RETURNS: DECEMBER 31, 1978-DECEMBER 31, 1998- --------------------------------------------------------------- 500 INDEX FUND S&P 500FISCAL CAPITAL INCOME TOTAL TOTALYEAR RETURN RETURN RETURN RETURN- --------------------------------------------------------------- 1979 12.1% 5.9% 18.0% 18.4%1980 25.5 6.4 31.9 32.41981 -9.8 4.6 -5.2 -4.91982 14.8 6.2 21.0 21.51983 16.2 5.1 21.3 22.51984 1.5 4.7 6.2 6.31985 26.1 5.1 31.2 31.81986 14.0 4.1 18.1 18.71987 2.3 2.4 4.7 5.31988 11.6 4.6 16.2 16.61989 26.7 4.7 31.4 31.71990 -6.8 3.5 -3.3 -3.11991 26.3 3.9 30.2 30.51992 4.4 3.0 7.4 7.61993 7.1 2.8 9.9 10.11994 -1.5 2.7 1.2 1.31995 34.4 3.0 37.4 37.61996 20.5 2.4 22.9 23.01997 31.1 2.1 33.2 33.41998 27.0 1.6 28.6 28.6- ---------------------------------------------------------------

See Financial Highlights table on page 31 for dividend and capital gainsinformation for the past five years.

CUMULATIVE PERFORMANCE: DECEMBER 31, 1988-DECEMBER 31, 1998- ---------------------------------------------------------------------- Average 500 Index General S&P 500 Fund* Equity Fund Index 1988 12 10000 10000 100001989 03 10702 10657 107091989 06 11642 11446 116541989 09 12872 12536 129021989 12 13130 12399 131691990 03 12726 12078 127721990 06 13516 12792 135761990 09 11654 10819 117101990 12 12688 11622 127601991 03 14522 13572 146131991 06 14479 13453 145801991 09 15242 14552 153591991 12 16515 15760 166471992 03 16088 15615 162271992 06 16387 15204 165351992 09 16890 15751 170571992 12 17732 17161 179161993 03 18497 17610 186981993 06 18575 17852 187891993 09 19042 18922 192751993 12 19477 19308 197211994 03 18726 18566 189731994 06 18798 18122 190531994 09 19709 19261 199851994 12 19697 18984 199821995 03 21607 20229 219271995 06 23654 22087 240201995 09 25530 24170 259291995 12 27061 24884 274901996 03 28505 26047 289661996 06 29771 27374 302661996 09 30678 28255 312021996 12 33241 29731 338021997 03 34111 28868 347081997 06 40048 33397 407681997 09 43042 37466 438211997 12 44261 36973 450801998 03 50416 40987 513681998 06 52070 40951 530641998 09 46886 35083 477861998 12 56943 42342 57963

AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 1998 --------------------------------- FINAL VALUE OF A 1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT- -------------------------------------------------------------------------------------------------------------------- 500 Index Fund* 28.62% 23.96% 19.04% $57,147 Average General Equity Fund 14.52 17.01 15.53 42,342 S&P 500 Index 28.58 24.06 19.21 57,963- --------------------------------------------------------------------------------------------------------------------

*Total return figures do not reflect the $10 annual account maintenance feeapplied on balances under $10,000.

AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998- ----------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ---------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL- ----------------------------------------------------------------------------------------------------- 500 Index Fund* 8/31/1976 28.62% 23.96% 16.04% 3.00% 19.04%- -----------------------------------------------------------------------------------------------------


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PERFORMANCE SUMMARYGROWTH INDEX FUND


TOTAL INVESTMENT RETURNS: NOVEMBER 2, 1992-DECEMBER 31, 1998- ------------------------------------------------------------- GROWTH INDEX FUND S&P*FISCAL CAPITAL INCOME TOTAL TOTALYEAR RETURN RETURN RETURN RETURN- ------------------------------------------------------------- 1992 2.6% 0.6% 3.2% 3.5%1993 -0.6 2.1 1.5 1.71994 0.8 2.1 2.9 3.11995 35.9 2.2 38.1 38.11996 22.0 1.7 23.7 24.01997 34.8 1.5 36.3 36.51998 41.1 1.1 42.2 42.2- -------------------------------------------------------------

*S&P/BARRA Growth Index.


CUMULATIVE PERFORMANCE: NOVEMBER 2, 1992-DECEMBER 31, 1998- ---------------------------------------------------------------------- Growth Average S&P/BARRA Index Fund Growth Fund Growth Index Nov 2, 92 10000 10000 100001992 12 10319 10440 103481993 03 10257 10707 102971993 06 10043 10776 100841993 09 10031 11293 100801993 12 10466 11561 105211994 03 10000 11112 100671994 06 9986 10880 100581994 09 10698 11453 107761994 12 10758 11312 108501995 03 11802 12091 119161995 06 13019 13301 131481995 09 14051 14416 141911995 12 14843 14796 149881996 03 15477 15515 156371996 06 16535 16254 167321996 09 17112 16707 173221996 12 18357 17643 185801997 03 19004 17337 192441997 06 22846 20148 231471997 09 24175 22308 245061997 12 25017 22107 253671998 03 29068 24775 294921998 06 30756 25262 312191998 09 28534 21986 289581998 12 35580 27160 36061

AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 1998 --------------------------------------- SINCE FINAL VALUE OF A 1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT- -------------------------------------------------------------------------------------------------------- Growth Index Fund* 42.21% 27.79% 22.95% $35,706Average Growth Fund 22.86 18.63 17.61 27,160S&P/BARRA Growth Index 42.16 27.94 23.14 36,061- --------------------------------------------------------------------------------------------------------


AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998- -------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION --------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL- -------------------------------------------------------------------------------------------------------------------------- Growth Index Fund* 11/2/1992 42.21% 27.79% 21.04% 1.91% 22.95%- --------------------------------------------------------------------------------------------------------------------------


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PERFORMANCE SUMMARYGROWTH INDEX FUND INSTITUTIONAL SHARES


TOTAL INVESTMENT RETURNS:MAY 14, 1998-DECEMBER 31, 1998- ---------------------------------------------------------- GROWTH INDEX FUND INSTITUTIONAL SHARES S&P*FISCAL CAPITAL INCOME TOTAL TOTALPERIOD RETURN RETURN RETURN RETURN- ---------------------------------------------------------- 1998** 20.0% 0.8% 20.8% 20.6%- ----------------------------------------------------------

*S&P/BARRA Growth Index.**Since inception.

See Financial Highlights table on page 32 for dividend and capital gainsinformation since inception.

CUMULATIVE PERFORMANCE: MAY 14, 1998-DECEMBER 31, 1998- ------------------------------------------------------------------------- Growth Index Fund Average Growth S&P/BARRA Institutional Fund Growth Index Shares May 14, 98 10000000 10000000 100000001998 06 10441710 10169845 104409201998 09 9690504 8803018 96846951998 12 12078723 10793380 12060213

AVERAGE ANNUAL TOTAL RETURNS PERIOD ENDED DECEMBER 31, 1998 ---------------------------------- FINAL VALUE OF A SINCE INCEPTION $10,000,000 INVESTMENT- -------------------------------------------------------------------------------------------------------------------- Growth Index Fund Institutional Shares 20.79% $12,078,723Average Growth Fund 7.93 10,793,380S&P/BARRA Growth Index 20.60 12,060,213- --------------------------------------------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURN: PERIOD ENDED DECEMBER 31, 1998- -------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION --------------------------------- DATE CAPITAL INCOME TOTAL- -------------------------------------------------------------------------------------------------------------------------- Growth Index Fund Institutional Shares 5/14/1998 20.00% 0.79% 20.79%- --------------------------------------------------------------------------------------------------------------------------

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PERFORMANCE SUMMARYVALUE INDEX FUND


TOTAL INVESTMENT RETURNS: NOVEMBER 2, 1992-DECEMBER 31, 1998- ------------------------------------------------------------ VALUE INDEX FUND S&P*FISCAL CAPITAL INCOME TOTAL TOTALYEAR RETURN RETURN RETURN RETURN- ------------------------------------------------------------ 1992 3.0% 0.7% 3.7% 3.8%1993 14.6 3.7 18.3 18.61994 -4.0 3.3 -0.7 -0.61995 33.0 3.9 36.9 37.01996 19.1 2.8 21.9 22.01997 27.4 2.4 29.8 30.01998 12.8 1.8 14.6 14.7

*S&P/BARRA Value Index.


CUMULATIVE PERFORMANCE: NOVEMBER 2, 1992-DECEMBER 31, 1998- ---------------------------------------------------------------------- Value Index Average Value S&P/BARRA Fund Fund Value Index Nov 2, 92 10000 10000 100001992 12 10370 10339 103811993 03 11315 10804 113401993 06 11628 10889 116571993 09 12218 11264 122601993 12 12265 11511 123111994 03 11856 11135 119091994 06 11969 11098 120191994 09 12266 11591 123271994 12 12168 11422 122331995 03 13339 12339 134121995 06 14492 13351 145801995 09 15653 14333 157401995 12 16654 15000 167591996 03 17707 15799 178301996 06 18073 16342 181951996 09 18532 16833 186761996 12 20286 18136 204451997 03 20624 18296 208051997 06 23606 21022 238161997 09 25756 22918 259991997 12 26315 23155 265751998 03 29343 25767 296461998 06 29495 25969 297991998 09 25669 22897 259511998 12 30170 27089 30475

AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 1998 ------------------------------------ SINCE FINAL VALUE OF A 1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT- ------------------------------------------------------------------------------------------------------------------- Value Index Fund* 14.64% 19.77% 19.68% $30,245Average Value Fund 16.99 18.67 17.56 27,089S&P/BARRA Value Index 14.67 19.88 19.82 30,475- -------------------------------------------------------------------------------------------------------------------


AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998

- ---------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ------------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL- ---------------------------------------------------------------------------------------------------------------------------- Value Index Fund* 11/2/1992 14.64% 19.77% 16.62% 3.06% 19.68%- ----------------------------------------------------------------------------------------------------------------------------


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PERFORMANCE SUMMARYVALUE INDEX FUND INSTITUTIONAL SHARES


TOTAL INVESTMENT RETURNS:

JULY 2, 1998-DECEMBER 31, 1998- ---------------------------------------------------------- VALUE INDEX FUND INSTITUTIONAL SHARES S&P*FISCAL CAPITAL INCOME TOTAL TOTALPERIOD RETURN RETURN RETURN RETURN- ---------------------------------------------------------- 1998** -0.4% 1.1% 0.7% 0.6%- ----------------------------------------------------------

*S&P/BARRA Value Index.

**Since inception.


CUMULATIVE PERFORMANCE: JULY 2, 1998-DECEMBER 31, 1998- ------------------------------------------------------------------ Value Index Fund Institutional Average Value S&P/BARRA Shares Fund Value Index Jul 2, 98 10000000 10000000 100000001998 09 8569356 8670633 85694301998 12 10069366 10243487 10063489

AVERAGE ANNUAL TOTAL RETURNS PERIOD ENDED DECEMBER 31, 1998 ---------------------------------- FINAL VALUE OF A SINCE INCEPTION $10,000,000 INVESTMENT- ------------------------------------------------------------------------------------------------------------------ Value Index Fund Institutional Shares 0.69% $10,069,366Average Value Fund 2.43 10,243,487S&P/BARRA Value Index 0.63 10,063,489- ------------------------------------------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURN: PERIOD ENDED DECEMBER 31, 1998- --------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ----------------------------------- DATE CAPITAL INCOME TOTAL- --------------------------------------------------------------------------------------------------------------------------- Value Index Fund Institutional Shares 7/2/1998 -0.38% 1.07% 0.69%- ---------------------------------------------------------------------------------------------------------------------------

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PERFORMANCE SUMMARYTOTAL STOCK MARKET INDEX FUND


TOTAL INVESTMENT RETURNS: APRIL 27, 1992-DECEMBER 31, 1998- ------------------------------------------------------------ TOTAL STOCK MARKET INDEX FUND WILSHIRE 5000FISCAL CAPITAL INCOME TOTAL TOTALYEAR RETURN RETURN RETURN RETURN- ------------------------------------------------------------ 1992 8.1% 2.3% 10.4% 10.7%1993 8.1 2.5 10.6 11.21994 -2.5 2.3 -0.2 -0.11995 33.1 2.7 35.8 36.41996 18.9 2.1 21.0 21.31997 29.0 2.0 31.0 31.31998 21.7 1.6 23.3 23.4


CUMULATIVE PERFORMANCE: APRIL 27, 1992-DECEMBER 31, 1998- --------------------------------------------------------------------------- Total Stock Market Equity Average General Willshire 5000 Fund Equity Fund Equity Index Apr 27, 92 10000 10000 100001992 06 10010 9928 100121992 09 10307 10209 103151992 12 11037 11112 110691993 03 11474 11477 115311993 06 11555 11658 116281993 09 11976 12264 120931993 12 12202 12502 123121994 03 11748 12101 118521994 06 11641 11834 117571994 09 12294 12483 123971994 12 12176 12292 123001995 03 13289 13185 134091995 06 14515 14423 146641995 09 15811 15665 160031995 12 16528 16112 167801996 03 17439 16977 177321996 06 18179 17876 185201996 09 18688 18313 190351996 12 19989 19251 203491997 03 20119 18815 204641997 06 23499 21808 239211997 09 25789 24283 262711997 12 26180 23940 267281998 03 29655 26714 302831998 06 30199 26741 308501998 09 26553 22738 271511998 12 32272 27417 32978

AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 1998 -------------------------------------- SINCE FINAL VALUE OF A 1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT- ------------------------------------------------------------------------------------------------------------------ Total Stock Market Index Fund* 23.26% 21.50% 19.22% $32,338Average General Equity Fund 14.52 17.01 16.30 27,417Wilshire 5000 Equity Index 23.39 21.78 19.57 32,978- ------------------------------------------------------------------------------------------------------------------


AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998- -------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ---------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL- -------------------------------------------------------------------------------------------------------------------------- Total Stock Market Index Fund* 4/27/1992 23.26% 21.50% 16.87% 2.35% 19.22%- --------------------------------------------------------------------------------------------------------------------------


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PERFORMANCE SUMMARYTOTAL STOCK MARKET INDEX FUND INSTITUTIONAL SHARES


TOTAL INVESTMENT RETURNS: JULY 7, 1997-DECEMBER 31, 1998- -------------------------------------------------------------- TOTAL STOCK MARKET INDEX FUND WILSHIRE INSTITUTIONAL SHARES 5000FISCAL CAPITAL INCOME TOTAL TOTALYEAR RETURN RETURN RETURN RETURN- -------------------------------------------------------------- 1997 7.6% 1.0% 8.6% 8.8%1998 21.7% 1.7% 23.4% 23.4%


CUMULATIVE PERFORMANCE: JULY 7, 1997-DECEMBER 31, 1998- ------------------------------------------------------------------------------- Total Stock Market Index Fund Average General Willshire 5000 Institutional Index Equity Fund Equity Index Jul 7, 97 10000000 10000000 100000001997 09 10691227 10909750 106987981997 12 10859588 10748130 108848941998 03 12306072 12028232 123327321998 06 12532590 12011035 125639551998 09 11022639 10215890 110572911998 12 13398011 12308759 13430560

AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 1998 ------------------------------------ FINAL VALUE OF A SINCE $10,000,000 1 YEAR INCEPTION INVESTMENT- ------------------------------------------------------------------------------------------------------------------------ Total Stock Market Index Fund Institutional Shares 23.37% 21.77% $13,398,011Average General Equity Fund 14.52 15.01 12,308,759Wilshire 5000 Equity Index 23.39 21.97 13,430,560- ------------------------------------------------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998- -------------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ---------------------------------- DATE 1 YEAR CAPITAL INCOME TOTAL- -------------------------------------------------------------------------------------------------------------------------------- Total Stock Market Index Fund Institutional Shares 7/7/1997 23.37% 19.88% 1.89% 21.77%- --------------------------------------------------------------------------------------------------------------------------------

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FUND PROFILE500 INDEX FUND

This Profile provides a snapshot of the fund's characteristics as of December31, 1998, compared where appropriate to its unmanaged target index. Keyelements of this Profile are defined on page 17.

PORTFOLIO CHARACTERISTICS- ----------------------------------------------------------- 500 INDEX S&P 500- ----------------------------------------------------------- Number of Stocks 513 500Median Market Cap $60.3B $60.3BPrice/Earnings Ratio 28.0x 28.0xPrice/Book Ratio 4.9x 4.9xYield 1.2% 1.3%Return on Equity 22.5% 22.5%Earnings Growth Rate 17.2% 17.2%Foreign Holdings 1.6% 1.6%Turnover Rate 6% --Expense Ratio 0.18% --Cash Reserves 0.1% --

INVESTMENT FOCUS- ------------------------------------------------[GRAPH]

TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)- ------------------------------------------------------- Microsoft Corp. 3.4%General Electric Co. 3.3Intel Corp. 2.0Wal-Mart Stores, Inc. 1.8Exxon Corp. 1.8Merck & Co., Inc. 1.8International Business Machines Corp. 1.7The Coca-Cola Co. 1.6Pfizer, Inc. 1.6Cisco Systems, Inc. 1.5- -------------------------------------------------------Top Ten 20.5%

VOLATILITY MEASURES- ---------------------------------------------------------- 500 INDEX S&P 500- ---------------------------------------------------------- R-Squared 1.00 1.00Beta 1.00 1.00

SECTOR DIVERSIFICATION (% OF COMMON STOCKS)- ------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1997 DECEMBER 31, 1998 -------------------------------------------------------- 500 INDEX 500 INDEX S&P 500 -------------------------------------------------------- Auto & Transportation 3.5% 2.5% 2.5%Consumer Discretionary 9.8 12.0 12.0Consumer Staples 11.5 9.8 9.8Financial Services 17.7 16.2 16.2Health Care 11.4 12.5 12.5Integrated Oils 7.2 5.2 5.2Other Energy 1.4 0.9 0.9Materials & Processing 6.1 3.7 3.7Producer Durables 4.0 3.2 3.2Technology 11.2 16.6 16.6Utilities 10.6 11.7 11.7Other 5.6 5.7 5.7- ------------------------------------------------------------------------------------------------------------------

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BETA. A measure of the magnitude of a fund's past share-price fluctuations inrelation to the ups and downs of the overall market (or appropriate marketindex). The market (or index) is assigned a beta of 1.00, so a fund with a betaof 1.20 would have seen its share price rise or fall by 12% when the overallmarket rose or fell by 10%.

CASH RESERVES. The percentage of a fund's net assets invested in "cashequivalents"--highly liquid, short-term, interest-bearing securities. Thisfigure does not include cash invested in futures contracts to simulate stockinvestment.

EARNINGS GROWTH RATE. The average annual rate of growth in earnings over thepast five years for the stocks now in a fund.

EXPENSE RATIO. The percentage of a fund's average net assets used to pay itsannual administrative and advisory expenses. These expenses directly reducereturns to investors.

FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocksor American Depositary Receipts of companies based outside the United States.

INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of twoattributes: market capitalization (large, medium, or small) and relativevaluation (growth, value, or a blend).

MEDIAN MARKET CAP. An indicator of the size of companies in which a fundinvests; the midpoint of market capitalization (market price x sharesoutstanding) of a fund's stocks, weighted by the proportion of the fund's assetsinvested in each stock. Stocks representing half of the fund's assets havemarket capitalizations above the median, and the rest are below it.

NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,the more diversified it is and the more likely to perform in line with theoverall stock market.

PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or bookvalue, per share. For a fund, the weighted average price/book ratio of thestocks it holds.

PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-shareearnings over the past year. For a fund, the weighted average P/E of the stocksit 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 bythe returns from the overall market (or its benchmark index). If a fund's totalreturn were precisely synchronized with the overall market's return, itsR-squared would be 1.00. If a fund's returns bore no relationship to themarket's returns, its R-squared would be 0.

RETURN ON EQUITY. The annual average rate of return generated by a companyduring the past five years for each dollar of shareholder's equity (net incomedivided by shareholder's equity). For a fund, the weighted average return onequity for the companies whose stocks it holds.

SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come fromeach of the major industry groups that compose the stock market.

TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested inits ten largest holdings. (The average for stock mutual funds is about 30%.) Asthis percentage rises, a fund's returns are likely to be more volatile becausethey are more dependent on the fortunes of a few companies.

TURNOVER RATE. An indication of trading activity during the past year. Fundswith high turnover rates incur higher transaction costs and are more likely todistribute capital gains (which are taxable to investors).

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 incomeearned over the past 30 days and is annualized, or projected forward for thecoming year. The index yield is based on the current annualized rate ofdividends paid on stocks in the index.

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FUND PROFILEGROWTH INDEX FUND

This Profile provides a snapshot of the fund's characteristics as of December31, 1998, compared where appropriate to an unmanaged index. Key elements of thisProfile are defined on page 17.

PORTFOLIO CHARACTERISTICS- ---------------------------------------------------------- GROWTH INDEX S&P 500- ---------------------------------------------------------- Number of Stocks 129 500Median Market Cap $112.8B $60.3BPrice/Earnings Ratio 38.7x 28.0xPrice/Book Ratio 11.1x 4.9xYield 0.8% 1.3%Yield--Institutional Shares 0.9% 1.3%Return on Equity 27.3% 22.5%Earnings Growth Rate 21.0% 17.2%Foreign Holdings 1.0% 1.6%Turnover Rate 29% --Expense Ratio 0.22% --Expense Ratio-- Institutional Shares 0.12%* --Cash Reserves 0.1% --

*Annualized.

INVESTMENT FOCUS- -----------------------[GRAPH]

TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)- ------------------------------------------------------- Microsoft Corp. 6.5%General Electric Co. 6.4Intel Corp. 3.6Wal-Mart Stores, Inc. 3.5Merck & Co., Inc. 3.4International Business Machines Corp. 3.3The Coca-Cola Co. 3.2Pfizer, Inc. 3.1Cisco Systems, Inc. 2.8Lucent Technologies, Inc. 2.8- -------------------------------------------------------Top Ten 38.6%

VOLATILITY MEASURES- ----------------------------------------------------- GROWTH INDEX S&P 500- ----------------------------------------------------- R-Squared 0.96 1.00Beta 1.02 1.00

SECTOR DIVERSIFICATION (% OF COMMON STOCKS)- --------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1998 ---------------------------------------------------------------- GROWTH INDEX GROWTH INDEX S&P 500 ---------------------------------------------------------------- Auto & Transportation 0.3% 0.1% 2.5%Consumer Discretionary 7.8 11.5 12.0Consumer Staples 21.1 16.9 9.8Financial Services 10.5 7.8 16.2Health Care 20.0 22.0 12.5Integrated Oils 0.0 0.0 5.2Other Energy 1.6 0.0 0.9Materials & Processing 5.1 0.7 3.7Producer Durables 2.4 1.6 3.2Technology 16.8 24.6 16.6Utilities 7.2 7.2 11.7Other 7.2 7.6 5.7- ---------------------------------------------------------------------------------------------------------------------

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21

FUND PROFILEVALUE INDEX FUND

This Profile provides a snapshot of the fund's characteristics as of December31, 1998, compared where appropriate to an unmanaged index. Key elements of thisProfile are defined on page 17.

PORTFOLIO CHARACTERISTICS- ---------------------------------------------------------- VALUE INDEX S&P 500- ---------------------------------------------------------- Number of Stocks 389 500Median Market Cap $25.3B $60.3BPrice/Earnings Ratio 21.4x 28.0xPrice/Book Ratio 3.0x 4.9xYield 1.6% 1.3%Yield--Institutional Shares 1.7% 1.3%Return on Equity 17.4% 22.5%Earnings Growth Rate 12.9% 17.2%Foreign Holdings 2.2% 1.6%Turnover Rate 33% --Expense Ratio 0.22% --Expense Ratio-- Institutional Shares 0.12%* --Cash Reserves 0.0% --

*Annualized.

INVESTMENT FOCUS- -----------------------[GRAPH]

TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)- ------------------------------------------------------- Exxon Corp. 3.7%AT&T Corp. 3.0Citigroup, Inc. 2.4Royal Dutch Petroleum Co. ADR 2.2BankAmerica Corp. 2.2BellSouth Corp. 2.0Bell Atlantic Corp. 1.7Time Warner, Inc. 1.7Fannie Mae 1.6Compaq Computer Corp. 1.5- -------------------------------------------------------Top Ten 22.0%

VOLATILITY MEASURES- ------------------------------------------------------- VALUE INDEX S&P 500- ------------------------------------------------------- R-Squared 0.95 1.00Beta 0.98 1.00

SECTOR DIVERSIFICATION (% OF COMMON STOCKS)- ----------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1998 -------------------------------------------------------------- VALUE INDEX VALUE INDEX S&P 500 -------------------------------------------------------------- Auto & Transportation 6.8% 5.2% 2.5%Consumer Discretionary 12.0 12.9 12.0Consumer Staples 1.5 2.2 9.8Financial Services 25.3 25.3 16.2Health Care 2.6 2.2 12.5Integrated Oils 14.6 11.0 5.2Other Energy 1.2 1.9 0.9Materials & Processing 7.1 7.0 3.7Producer Durables 5.7 5.0 3.2Technology 5.4 7.5 16.6Utilities 14.2 16.2 11.7Other 3.6 3.6 5.7- -----------------------------------------------------------------------------------------------------------------------

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22FUND PROFILETOTAL STOCK MARKET INDEX FUND

This Profile provides a snapshot of the fund's characteristics as of December31, 1998, compared where appropriate to its unmanage

· 2017-09-14* figures for the average comparable funds are compiled by lipper, inc. the lipper...

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