UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-05628

Registrant’s telephone number, including area code: (610) 669-1000

Date of fiscal year end: September 30

Date of reporting period: October 1, 2015 – March 31, 2016

Item 1: Reports to Shareholders

Semiannual Report | March 31, 2016

Vanguard U.S. Value Fund

Vanguard’s Principles for Investing Success

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

Goals. Create clear, appropriate investment goals.

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

Discipline. Maintain perspective and long-term discipline.

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

We believe there is no wiser course for any investor.

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

See the Glossary for definitions of investment terms used in this report.

About the cover: Pictured is a sailing block on the Brilliant, a 1932 schooner docked in Mystic, Connecticut. A type of pulley, the sailing block helps coordinate the setting of the sails. At Vanguard, the intricate coordination of technology and people allows us to help millions of clients around the world reach their financial goals.

Your Fund’s Total Returns

Chairman’s Letter

Dear Shareholder,

Despite a bout of volatility, U.S. stocks produced solid gains for the six months ended March 31, 2016. Stocks of larger-capitalization companies generally outpaced those of smaller firms, while growth stocks finished slightly ahead of their value counterparts.

Against this investment backdrop, Vanguard U.S. Value Fund, which focuses on mid- and large-cap value stocks, returned 4.78%. The result trailed the 7.15% return of its benchmark index, the Russell 3000 Value Index Fund, as well the 5.18% average return of its peers.

Eight of the fund’s ten industry sectors posted positive results, with stocks of utilities, industrials, and information technology companies adding most to returns. Financials, one of the market’s weakest performers for the period, weighed heavily on performance. The fund’s holdings in most sectors failed to keep pace with those represented in the index, leading to its relative underperformance.

Stocks charted an uneven course en route to a favorable outcome
The broad U.S. stock market returned about 7% over the six months. The period began and ended strongly, with fluctuations in the middle as China’s economic slowdown and falling oil and commodity prices worried investors.

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Stocks rallied in March as investors again seemed encouraged by news about monetary policy. The Federal Reserve indicated, after a mid-March meeting, that it would raise interest rates fewer times in 2016 than previously anticipated. And central bankers in Europe and Asia kept up stimulus measures to combat weak growth and low inflation.

International stocks returned about 3% for the period after surging more than 8% in March. Stocks from emerging markets and from developed markets of the Pacific region outperformed European stocks, which were nearly flat.

Bonds produced gains following a subpar start
After posting weak results for the first three months of the period, bonds managed solid gains in the final three. The broad U.S. taxable bond market returned 2.44% for the fiscal half year.

With stocks volatile and the Fed proceeding cautiously with rate hikes, bonds proved attractive. The yield of the 10-year U.S. Treasury note closed at 1.77% at the end of March, down from 2.05% six months earlier. (Bond prices and yields move in opposite directions.)

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Returns for money market funds and savings accounts remained limited by the Fed’s target rate of 0.25%–0.5%—still low despite rising a quarter percentage point in December.

International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 6.90%. International bonds got a boost as foreign currencies strengthened against the dollar, a turn-about from the trend of recent years. Even without this currency benefit, however, international bond returns were solidly positive.

The fund delivered solid gains despite trailing its benchmark
Vanguard U.S. Value Fund focuses primarily on stocks of large and midsize companies that, in the opinion of its advisor, Vanguard Quantitative Equity Group, offer a good balance between reasonable valuations and attractive growth prospects relative to their peers. The advisor uses a quantitatively driven investment approach, employing a proprietary computer model to evaluate thousands of companies. The goal is to identify stocks that are selling below their true worth. The fund is well diversified, investing in more than 200 stocks across all market sectors.

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As I mentioned, your fund trailed its benchmark for the most recent six-month period. The fund’s underperformance can be attributed to disappointing results in several sectors.

While the fund notched gains in industrials, information technology, energy, consumer staples, and health care, its holdings in these sectors failed to keep pace with those of the benchmark. The fund’s consumer

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discretionary stocks lost ground, but the benchmark’s holdings in the sector added to returns. Both the fund and its index posted negative results in financials, although the sector held up better in the benchmark.

Telecommunication services was a bright spot for the fund, as its holdings in the sector produced modestly higher returns than those in the benchmark. The fund also had a stronger showing in the utilities sector, which contributed solidly to performance in both the fund and the index.

For more about the advisor’s strategy and the fund’s positioning during the six months, see the Advisor’s Report that follows this letter.

Consider rebalancing to manage your risk
Let’s say you’ve taken the time to carefully create an appropriate asset allocation for your investment portfolio. Your efforts have produced a diversified mix of stock, bond, and money market funds tailored to your goals, time horizon, and risk tolerance.

But what should you do when your portfolio drifts from its original asset allocation as the financial markets rise or fall? Consider rebalancing to bring it back to the proper mix.

Just one year of outsized returns can throw your allocation out of whack. Take 2013 as an example. That year, the broad stock market (as measured by the Russell 3000 Index) returned 33.55% and the broad taxable bond market (as measured by the Barclays U.S. Aggregate Bond Index) returned –2.02%. A hypothetical portfolio that tracked the broad domestic market indexes and started the year with 60% stocks and 40% bonds would have ended with a more aggressive mix of 67% stocks and 33% bonds.

Rebalancing to bring your portfolio back to its original targets would require you to shift assets away from areas that have been performing well toward those that have been falling behind. That isn’t easy or intuitive. Rebalancing is a way to minimize risk rather than maximize returns and to stick with your investment plan through different types of markets. (You can read more about our approach in Best Practices for Portfolio Rebalancing at vanguard.com/research.)

It’s not necessary to check your portfolio every day or every month, much less rebalance it that frequently. It may be more appropriate to monitor it annually or semiannually and rebalance when your allocation swings 5 percentage points or more from its target.

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It’s important, of course, to be aware of the tax implications. You’ll want to consult with your tax advisor, but generally speaking, it may be a good idea to make any asset changes within a tax-advantaged retirement account or to direct new cash flows into the underweighted asset class.

However you go about it, keeping your asset allocation from drifting too far off target can help you stay on track with the investment plan you’ve crafted to meet your financial goals.

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
April 12, 2016

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Advisor’s Report

For the six months ended March 31, 2016, Vanguard U.S. Value Fund returned 4.78%, lagging the Russell 3000 Value Index by 2.37 percentage points. For the six months, the broad U.S. equity market was up 7.30%. Improvement was seen primarily in large- and mid-capitalization stocks, which returned 7.75%, outpacing the 2.02% return of small-cap stocks. Within the broad market, growth stocks slightly outperformed their value counterparts during this period, returning 7.45%.

Developed and international markets saw improvements compared with their losses in the prior year; emerging markets surpassed developed markets by 4.85 percentage points. Performance within the Russell 3000 Value benchmark was strong: All ten sectors generated positive returns. Results were best in telecommunication services, utilities, and materials companies, but only mildly positive in energy and financial firms.

The U.S. economy continued to grow in 2016, but at a slower pace. Fourth-quarter 2015 real GDP grew 1.4%, compared with 2.0% in the third quarter. The deceleration was attributed primarily to downturns in nonresidential fixed investment, exports, and state and local government spending. Corporate profits decreased 8.1% in the fourth quarter, the largest quarterly decline since the first quarter of 2011. However, the U.S. job market further improved. Total nonfarm payroll employment rose by 215,000 in March; the unemployment rate rose slightly to 5.0%. In the first quarter of 2016, oil prices declined significantly, but have since recovered after bottoming out in mid-February. This volatility spilled over into the global stock markets, which saw similar price action in the quarter.

The Federal Reserve raised interest rates in December after keeping rates near zero since 2008. Further gradual rate hikes are expected later this year, depending on global economic data. Although rates are rising in the United States, several of the world’s central banks, including the European Central Bank and the Bank of Japan, are experimenting with negative interest rates in an attempt to spur economic growth.

While it’s important to understand how overall portfolio performance is affected by these macroeconomic factors, we emphasize that our investment process focuses on specific stock fundamentals and portfolio characteristics. Our stock selection model evaluates the companies within our investment universe to identify those with attractive characteristics that we believe will outperform over the long run. To do this, we use a strict quantitative process that focuses on a combination of five key themes: high quality—healthy balance sheets and consistent cash flow generation; effective use of capital—sound investment policies that favor internal over external funding; consistent earnings growth—a demonstrated ability to increase earnings year after year; strong market sentiment—market confirmation of our view; and reasonable valuation—avoidance of overpriced stocks.

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We evaluate the interaction of these themes on all the stocks in our universe each day, seeking to capitalize on investor biases across the market. Using the results of our model, we then construct our portfolio with the goal of maximizing expected return, while minimizing exposure to risks that our research indicates do not improve returns, such as industry selection and other risks relative to our benchmark.

For the six-month period, our valuation, management decisions, and quality models contributed to performance. Our sentiment model made a minor contribution to performance, and our growth model mildly detracted from performance.

Our stock selection results over the past six months were disappointing across sectors. We were able to produce positive results in only the three best-performing sectors in the benchmark: telecommunication services, utilities, and materials.

In telecommunication services, our most successful positions included Verizon (+27.5%), CenturyLink (+32.0%), and Cincinnati Bell (+24.0%). Performance within utilities was driven by UGI (+17.2%), WGL Holdings (+27.4%), and Exelon (+23.3%). Materials benefited from our positions in Avery Dennison (+28.9%) and Dow Chemical (+22.1%).

We were not able to match the outperformance across all sectors. The most disappointing results were in financials, information technology, and energy. In financials, Santander (–48.6%), Universal Insurance (–38.5%), and Heritage Insurance (–18.6%) did not perform as expected. Fitbit (–59.8%), EarthLink Holdings (–26.1%), and Jabil Circuit (–13.2%) similarly detracted from performance in information technology. In energy, Teekay Tankers (–45.2%), Alon USA Energy (–41.6%), and Marathon Petroleum (–18.5%) detracted from performance.

Portfolio Managers:

James P. Stetler, Principal

Anatoly Shtekhman, CFA

Binbin Guo, Principal, Head of Equity
Research and Portfolio Strategies

Vanguard Quantitative Equity Group

April 18, 2016

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U.S. Value Fund

Fund Profile
As of March 31, 2016

Investment Focus

1 The expense ratio shown is from the prospectus dated January 27, 2016, and represents estimated costs for the current fiscal year. For the six months ended March 31, 2016, the annualized expense ratio was 0.23%.

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U.S. Value Fund

Performance Summary

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

Fiscal-Year Total Returns (%): September 30, 2005, Through March 31, 2016

Average Annual Total Returns: Periods Ended March 31, 2016

See Financial Highlights for dividend and capital gains information.

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U.S. Value Fund

Financial Statements (unaudited)

Statement of Net Assets
As of March 31, 2016

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

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U.S. Value Fund

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U.S. Value Fund

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U.S. Value Fund

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U.S. Value Fund

• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $12,339,000.
1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 99.9% and 1.2%, respectively, of net assets.
2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
3 Includes $13,116,000 of collateral received for securities on loan.
4 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
5 Securities with a value of $399,000 have been segregated as initial margin for open futures contracts.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.
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U.S. Value Fund

Statement of Operations

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

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U.S. Value Fund

Statement of Changes in Net Assets

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

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U.S. Value Fund

Financial Highlights

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

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U.S. Value Fund

Notes to Financial Statements

Vanguard U.S. Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.

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U.S. Value Fund

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

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U.S. Value Fund

Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At March 31, 2016, the fund had contributed to Vanguard capital in the amount of $111,000, representing 0.01% of the fund’s net assets and 0.04% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.

Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

The following table summarizes the market value of the fund’s investments as of March 31, 2016, based on the inputs used to value them:

D. At March 31, 2016, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:

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

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U.S. Value Fund

E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year.

H. Management has determined that no material events or transactions occurred subsequent to March 31, 2016, that would require recognition or disclosure in these financial statements.

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About Your Fund’s Expenses

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

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

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

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Trustees Approve Advisory Arrangement

The board of trustees of Vanguard U.S. Value Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Quantitative Equity Group. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.

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Glossary

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

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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.

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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.

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

Semiannual Report | March 31, 2016

Vanguard Capital Value Fund

Vanguard’s Principles for Investing Success

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

Goals. Create clear, appropriate investment goals.

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

Discipline. Maintain perspective and long-term discipline.

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

We believe there is no wiser course for any investor.

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

Your Fund’s Total Returns

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Chairman’s Letter

Dear Shareholder,

Vanguard Capital Value Fund returned 1.19% for the six months ended March 31, 2016. It trailed its benchmark index, the average return of its peers, and the broad U.S. stock market, all of which returned 5% or more.

Larger-capitalization firms easily outperformed smaller-company stocks. At the same time, value stocks, typically viewed as potentially underpriced, slightly trailed their growth counterparts, which are expected to generate faster earnings growth. Value stocks across the capitalization spectrum are the focus of the fund’s advisor, Wellington Management Company.

Stocks charted an uneven course en route to a solid outcome
The broad U.S. stock market returned about 7% over the six months. The period began and ended strongly, with fluctuations in the middle as China’s economic slowdown and falling oil and commodity prices worried investors.

Stocks rallied in March as investors again seemed encouraged by news about monetary policy. The Federal Reserve indicated, after a mid-March meeting, that it would raise interest rates fewer times in 2016 than previously anticipated. And central bankers in Europe and Asia kept up stimulus measures to combat weak growth and low inflation.

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International stocks returned about 3% for the period after surging more than 8% in March. Stocks from emerging markets and from developed markets of the Pacific region outperformed European stocks, which were nearly flat.

Bonds produced gains following a subpar start
After posting weak results for the first three months of the period, bonds managed solid gains in the final three. The broad U.S. taxable bond market returned 2.44% for the fiscal half year.

With stocks volatile and the Fed proceeding cautiously with rate hikes, bonds proved attractive. The yield of the 10-year U.S. Treasury note closed at 1.77% at the end of March, down from 2.05% six months earlier. (Bond prices and yields move in opposite directions.)

Returns for money market funds and savings accounts remained limited by the Fed’s target rate of 0.25%–0.5%—still low despite rising a quarter percentage point in December.

International bond markets (as measured by the Barclays Global Aggregate Index ex USD) returned 6.90%. International bonds got a boost as foreign currencies strengthened against the dollar, a turn-about from the trend of recent years. Even without this currency benefit, however, international bond returns were solidly positive.

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The fund underperformed in eight of ten industry sectors
Capital Value’s two portfolio managers at Wellington Management independently manage separate portions of the fund’s assets. They employ a relatively aggressive approach in selecting companies of all sizes that they believe are misunderstood or underappreciated by the market.

Unlike the case with stock funds that invest in one market segment, the Capital Value Fund’s flexibility to invest in various segments can lead to higher portfolio turnover and wider performance swings. This strategy led to underperformance for the six months.

In seven of the ten industry sectors, the managers’ selections underperformed their counterparts in the fund’s benchmark, the Russell 3000 Value Index. Health care proved the most significant detractor, as the volatile biotechnology subsector was a sore point. While the index’s biotech listings returned about 2%, the fund’s biotech portfolio returned –25%.

Information technology was also a hindrance, with the fund’s IT holdings returning about –3% compared with nearly 13% for the index. And although the benchmark’s energy stocks (+4%) rebounded a bit as oil prices began to stabilize, the fund’s energy portfolio (–6%) was hurt by losses among oil and gas exploration firms.

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The fund’s financial stocks, its largest sector, also declined, returning about –6%, even as financials in the index ended the period about where they started. Consumer finance and insurance holdings were the fund’s biggest relative detractors in the sector.

Materials and consumer discretionary were notable bright spots. The managers’ holdings in materials returned about 23% as their paper and forest product selections were standouts. Consumer discretionary stocks—particularly hotels and casinos—were also strong performers.

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The Advisor’s Report that follows this letter provides more details about the managers’ oversight of the fund during the six months.

Consider rebalancing to manage your risk
After you’ve created an investment portfolio—with a diversified mix of stock, bond, and money market funds tailored to your goals, time horizon, and risk tolerance—what’s next?

As stocks and bonds rise or fall over time, and your portfolio drifts from its original asset allocation, consider rebalancing back to your targets.

Just one year of outsized returns can throw your allocation out of whack. For example, take a year like 2013, when the broad stock market returned nearly 34% and the broad taxable bond market declined. A hypothetical simple portfolio that began the year with 60% stocks and 40% bonds would have ended with a more aggressive mix of 67% stocks and 33% bonds.

Rebalancing means shifting dollars from assets that have performed well toward those that have fallen behind. That isn’t easy or intuitive, but it helps to manage risk because, over time, riskier assets tend to grow faster. (You can read more about our approach in Best Practices for Portfolio Rebalancing, at vanguard.com/research.)

You might consider, for example, monitoring your portfolio annually or semiannually and rebalancing when your allocations shift about 5 percentage points from their target. And be aware of the tax implications of selling.

Keeping your asset allocation from drifting too far off target can help you stay on track with the investment plan you’ve crafted to meet your financial goals.

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
April 12, 2016

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Advisor’s Report

For the six months ended March 31, 2016, the Capital Value Fund returned 1.19%, reflecting the combined results of two managers at your fund’s investment advisor, Wellington Management Company llp. The use of two managers who independently oversee separate portions of the portfolio provides exposure to distinct yet complementary investment approaches, enhancing the diversification of your fund. It is not uncommon for different managers to have different views about individual securities or the broader investment environment.

The managers have prepared a discussion of the investment environment that existed during the half year and of how their portfolio positioning reflects this assessment. These comments were prepared on April 18, 2016.

Portfolio Manager:

Peter I. Higgins, CFA
Senior Managing Director

Our investment approach is to identify stocks that possess considerable upside potential because of compelling valuation characteristics along with catalysts that we believe could unlock that potential within 12 to 18 months. We often employ a contrarian approach that seeks to exploit inefficiencies in the market. We attempt to anticipate changes, both positive and negative, that could affect our investment thesis. We believe that in the short term, markets can be quite irrational, and so our trading activity tries to capture some of these anomalies. We do not try to mimic any index; instead, our goal is to substantially outperform the market in the intermediate to longer term.

Our holdings in the information technology sector weighed on relative results. Selection was also weak in financials and health care. Cobalt International Energy (energy), Portola Pharmaceuticals (health care), and SunEdison (information technology) were our largest relative detractors.

Shares of Cobalt, an oil exploration and production company with an oil portfolio in North America and West Africa, fell amid general weakness in oil prices. We continue to hold the stock because we believe that Cobalt may have a world-class inventory of prospective discoveries. Shares of Portola—a biopharmaceutical company focused on therapeutics for thrombosis, hematological disorders, and inflammation—fell after it released mixed results from a trial of a key drug, betrixaban. We believe that the stock is oversold and undervalued based on Portola’s lead asset, andexanet alfa, which has a significant market opportunity with potential value greater than Portola’s current market capitalization.

Investor skepticism about SunEdison, a U.S.-based solar-installation firm, has focused on the company’s long-term ability to grow its business at its targeted aggressive rate. Unrest in capital markets also weighed on its stock price and hindered SunEdison’s ability to continue financing its operations by accessing the markets. We sold the holding to pursue

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opportunities with more attractive risk/ reward profiles as we became more concerned about the company’s ability to execute on its business plan.

Selection in materials, on the other hand, helped offset negative results. Our underweight exposure to financials was also beneficial. Top individual contributors to performance for the six months included Norbord (materials) and XPO Logistics (industrials).

The stock of Norbord, an international forest products company headquartered in Toronto, Ontario, rose after it reported better-than-expected quarterly results.

We believe that Norbord is well-positioned to benefit from improving demand trends for oriented strand board in North America and Europe over the medium to long term, driven by strengthening housing markets. Shares of XPO Logistics, a U.S.-based provider of supply-chain logistics, rose after its fourth-quarter results beat consensus expectations and it issued favorable guidance. We believe that XPO is transitioning from an acquisition story to an integration story with a focus on organic growth, cash flow, and pay-down of debt. We remain positive on XPO over the long term, as it has repeatedly exceeded most of its previous goals.

As always, our sector positioning remains a product of our bottom-up stock-selection process. During the half year, our exposure to health care and financials increased, though financials remains one of our most underweighted sectors. In health care, we established a new position in Merck and added to our position in Allergan; both are U.S.-based pharmaceutical companies. In financials, we added a holding in Bank of America, a U.S.-based multinational banking and financial services corporation.

Our exposure to energy and information technology, on the other hand, declined. In energy, we trimmed our holdings in Pioneer Natural Resources, a petroleum, natural gas, and natural gas liquids exploration and production company. In IT, we eliminated our position in semiconductor manufacturer Micron Technology.

We consider our portfolio well-positioned for an uncertain economic environment, and we continue to believe that the United States will remain the preferred market for investment globally. Five changes have improved the near-term outlook for U.S. equities: increased stimulus in China, a rebound in oil prices, more accommodative central banks, a weaker U.S. dollar, and easier U.S. financial conditions.

In early 2016, stocks moved in virtual lockstep with the price of oil as fears of a recession weighed on investors’ minds. But in the second half of the first quarter, stocks surged as solid economic data, a stabilization in oil prices, and accommodative commentary from the Federal Reserve helped calm the market’s jitters. We believe that the Fed’s recent dovish tone signals that it will limit the number of interest rate hikes this year, and that the Fed will continue to proceed cautiously in adjusting policy, which should help U.S. equities.

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Although we cannot predict market outcomes, we continue to identify companies with compelling valuations, the potential for improvement in sentiment, and identifiable catalysts.

Portfolio Manager:

David W. Palmer, CFA
Senior Managing Director

Our portion of the fund focuses on stocks that trade at a discounted multiple to the broad market, based on either current earnings or those we expect within a reasonable time frame. Our approach searches for companies with pronounced negative sentiment, controversy, or perceived event risk that, through our fundamental research and analysis, we find to be temporary or overstated. Because individual holdings can be out of phase with the market for extended periods, we seek to build a portfolio of stocks with unique drivers, diversified across capitalization sizes and industries.

It was encouraging to see equity markets post a gain for the six months, though the path was not a straight line. What started as a rally into the end of calendar year 2015, with hopes for a reacceleration of earnings prospects in 2016, soured somewhat in January as companies forecast muted growth and investors worried about destabilization in China’s economy.

By the end of March, however, markets looked favorably on the Federal Reserve’s revised outlook for fewer interest rate hikes this year, and most subsegments of the market moved higher, with the key exception of rate-sensitive financials.

Given the relatively cautious tone of many corporate management teams in providing guidance for the year ahead, it’s not surprising that investors bid up the prices of less economically sensitive stocks. Telecommunication services and utilities were the best-performing sectors in the Russell 3000 Value Index for the six months, with consumer staples also outperforming the benchmark. Financials were the worst performer in the index, and the energy, consumer discretionary, and health care sectors also lagged the broad market. Our contrarian value approach led us to research and evaluate many of these areas in the face of investor uncertainty, and we added new health care and energy investments at what we felt were highly attractive valuations.

Among the holdings that contributed to six-month performance were metals distributor Reliance Steel & Aluminum, casino-gambling operator Las Vegas Sands, and integrated utility Exelon. Reliance adjusted quickly to a difficult demand environment by downsizing its energy division, improving its inventory management, and investing for growth in automotive and aerospace, all while its rivals were reeling from sharper downturns in their businesses. Reliance also used its impressive cash generation to repurchase stock and make several targeted acquisitions, increasing its earning power.

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Las Vegas Sands benefited from improved market sentiment toward casino stocks in Macau, as industry profits appeared to find a floor after a protracted decline. The company also demonstrated prudent expense control and continued to bump up its dividend. Exelon removed an area of uncertainty by reaching an agreement with regulators to complete its long-delayed acquisition of Maryland-regulated electric utility Pepco. It also articulated a credible plan for raising the dividend modestly over the next three years.

Stock selection was beneficial in materials and consumer discretionary, although we faced challenges in a few areas, notably technology, energy, and financials. In energy, cash flows for natural gas producer Southwestern Energy were much lower than expected because of the extremely mild U.S. heating season; the December-through-February period was the warmest ever measured by the National Oceanic and Atmospheric Administration for the contiguous 48 states. Southwestern has greatly reduced its capital budget until futures prices merit a resumption of drilling.

Among the portfolio’s biggest detractors was Western Digital, which makes data-storage media. The U.S. Treasury said it would investigate the company’s plan to sell a 15% stake to a Chinese state-owned entity for the attractive price of $3.8 billion; after that, the sale was canceled, complicating Western Digital’s plans for financing its takeover of flash-memory producer SanDisk. Although the deal’s terms without the Chinese investment are less attractive, we believe that the current stock price meaningfully discounts the prospects of the combined company.

Retirement-services provider Principal Financial underperformed amid stock market volatility, falling long-term interest rates, and concerns about new retirement-industry regulations from the U.S. Department of Labor. Our research suggests that Principal has been executing relatively well in a competitive industry, and the government regulations proposed in early April appear largely benign to Principal’s business.

Southwestern, Western Digital, and Principal Financial all remained in our portfolio at the end of the period.

Our team is always on the lookout for good companies with attractive assets that have sold off at notable discounts to their underlying value because of perceived near-term difficulties. There has been no shortage of these situations in recent months, and we have acquired a range of new holdings that we believe offer intriguing risk/reward prospects and a diverse set of future performance drivers.

In health care, we initiated positions in several companies, including drug distributor McKesson, generics manufacturer Teva Pharmaceutical, and testing device and consumables maker Cepheid, among others. In particular, McKesson is a strong franchise whose shares have significantly underperformed after it reduced earnings guidance because of contract losses

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related to customer consolidation and pressure on generic drug pricing. Although the company is in the penalty box with investors, we consider the stock’s discount to the market multiple highly attractive.

In energy, we added positions in producers Anadarko Petroleum, Cabot Oil & Gas, and Energen amid sharp selloffs for each. In technology, we bought a stake in semiconductor capital equipment maker Lam Research, whose acquisition of rival KLA-Tencor we expect will result in significant synergy savings and cash-generation potential.

Through these additions, we strive to invest in assets that we believe should deliver superior returns over time to Capital Value shareholders, with an appropriate eye toward managing the risk and diversification of the portfolio. We appreciate your trust and confidence in our efforts.

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Capital Value Fund

Fund Profile
As of March 31, 2016