Investment Strategy
The Portfolio directs all of its assets into Vanguard Short-Term Reserves Account, through which the Portfolio owns funding agreements (traditional and separate account), synthetic investment contracts (SICs), and shares of Vanguard Federal Money Market Fund. Funding agreements and synthetic investment contracts are interest-bearing contracts that are structured to preserve principal and accumulate interest earnings over the life of the investment. Traditional funding agreements generally pay interest at a fixed interest rate and have fixed maturity dates that normally range from 2 to 5 years. Separate account funding agreements and synthetic investment contracts pay a variable interest rate and have an average duration range between 2 and 5 years. Investments in either new funding agreements or synthetic investment contracts are based upon available liquidity in the Portfolio, and the competitiveness of offered yields, based on market conditions and trends. The Short-Term Reserves Account also purchases shares of the Federal Money Market Fund to meet normal liquidity needs.
The total amount invested in the Federal Money Market Fund is expected to range between 0% and 25%. The Federal Money Market Fund invests in high-quality, short-term money market instruments issued by the U.S. government and its agencies and instrumentalities. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security). The Federal Money Market Fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.
The performance of the Interest Accumulation Portfolio will reflect the blended earnings of the funding agreements, synthetic investment contracts, and Federal Money Market Fund shares held by the Portfolio (minus the Portfolio's expenses).
The Portfolio has a longer average maturity than money market funds, which should result in higher yields when interest rates are stable or declining. However, because only a portion of the Portfolio's investment matures each year, its yield will change more slowly than that of a money market fund. As a result, when interest rates are rising, the Portfolio's yield may fall below money market funds' yields for an extended time period. The Portfolio may, from time to time, invest all or a significant portion of its assets in the Federal Money Market Fund.
Note: Income Portfolio and Interest Accumulation Portfolio both invest in Vanguard Short-Term Reserves Account, which, in turn, invests in Vanguard Federal Money Market Fund. Vanguard Short-Term Reserves Account's investment in Vanguard Federal Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of the investment at $1 per share, it is possible that Vanguard Short-Term Reserves Account may lose money by investing in the Fund.
Investment Risks
The Portfolio primarily is subject to inflation risk, income risk, manager risk, and credit risk. It also has low levels of derivatives risk. Traditional funding agreements are backed by the financial strength of the insurance companies that issue the contracts. Every effort is made to select high-quality insurance companies. However, the Portfolio may lose value if an insurance company is unable to make interest or principal payments when due.
Separate account funding agreements and synthetic investment contracts (SICs) are issued by banks, insurance companies, and other issuers, and are designed to provide a stable asset value. However, unlike traditional funding agreements, they are supported by a diversified portfolio of high-quality fixed income assets and mutual funds as well as the financial strength of the issuing institution. Returns earned vary with the performance of the underlying fixed income assets or mutual funds. Synthetic investment contracts are also called “alternative investment contracts or wrapped bond contracts.
