Q: How would you describe the investment philosophy of your fund?

A: We believe that the multi-manager structure provides investors with diversity of thought and diversity of the portfolio. Vanguard International Value Fund features three investment advisors that employ a bottom-up strategy to construct a portfolio of undervalued stocks in developed and emerging markets.

The managers are Sanford C. Bernstein & Co., LLC , a unit of Alliance Bernstein, LP ; and Hansberger Global Investors, Inc, and Lazard Asset Management. Currently, Bernstein and Hansberger oversee approximately 45% of fund assets, while Lazard, who joined the fund’s management team in July of this year, manages about 10%.

Hansberger’s investment process is driven by fundamental company research. The managers seek to add value by selecting one stock at a time, looking for industry leaders with a sustainable competitive advantage. They believe that stock picking in the international arena requires a comprehensive understanding of a company’s operations, the metrics that define good businesses, as well as an awareness of sector opportunities and country nuances.

Hansberger is much less concerned with share price movements and market trends than with the inherent value of stable companies, strong products, and sound management. They concentrate on the underlying economic and business fundamentals of each investment.

Bernstein’s investment philosophy is research-driven and value-based; they seek to buy the greatest amount of longterm earnings for the best price. Investors often overreact to near term events, causing securities to become mispriced relative to their true values or long-term earnings prospects. Bernstein attempts to separate fact from emotion in understanding companies and industries that may be undergoing stress, and looks to exploit mispricings created by investor overreaction.

Lazard’s investment process employs a relative value approach that seeks an appropriate trade-off between low relative valuation and high financial productivity of individual securities. The portfolio management team uses Return on Equity (“ROE ”) as the primary measure of financial productivity, while secondary measures include Return on Assets (“RO A”), cash ROE , and operating margin. Lazard’s research analysts take a global sector approach to stock selection that generally supersedes country and regional boundaries. Sector weights can differ meaningfully from the benchmark because the investment process is research- driven, relying on bottom-up stock analysis. Lazard’s strategy uses a concentrated approach by targeting 30 to 50 international stocks.

Q: What is your definition of international? Are all the holdings outside the U.S.?

A: Correct. The fund invests in companies of all market caps located primarily in developed-- markets but also in emerging markets in Eastern and Western Europe, the Far East, Latin America, and Canada.

Q: How would you define your universe? How many stocks belong to it?

A: Broadly, the universe of potential investments consists of all stocks outside the United States. Hansberger selects securities from a global universe of more than 10,000 companies in more than 50 different countries. Bernstein looks for companies in developed markets with market cap of more than $750 million and for companies in emerging markets with market cap of above $75 million. The investable universe for Lazard includes companies with a market capitalization of $3 billion or greater domiciled in those countries that make up the MSC I ACW I ex-U.S. Index.

Security liquidity is an important consideration in all three advisors’ investment decisions. Before they invest, they evaluate each market’s liquidity based upon its investable market cap, the breadth, depth and number of investable companies, trading volumes, transaction costs, settlement costs and bid/ask spreads.

Q: In terms of portfolio construction, what benchmarks do you use? Are there specific areas or sectors where the fund is more concentrated?

A: The fund typically holds about 200 stocks. The benchmark is the Morgan Stanley Capital International (MSC I) Europe, Australasia, Far East (EAFE ) Index. Although the fund is not intended to mirror any specific index, the advisors use this benchmark, as well as the MSC I All Country World ex U.S. Index, when constructing their portfolios.

Currently, the largest concentration of the fund is in Japan, with 21.3% of the assets, UK with about 21%, and France with 12%.

Sectorwise, the fund currently invests about 30% of its assets in the financial sector, about 12% in energy, and about 11% in consumer discretionary.

Q: Screening a universe of 10,000 stocks seems like a serious task. Would you explain how the managers narrow that list down? What parameters do you monitor and why?

A: Since Hansberger is driven by fundamental research, it has four offices around the globe and its analysts perform about 1,400 company visits annually. The analysts focus on the companies they believe to be undervalued relative to their normalized earnings power over a full economic cycle, or to their NAV.

Investment decision-making is centralized in the main office in Florida, but they have a team approach with each office and analyst being responsible for specific country and industry assignments. Stocks that meet Hansberger’s valuation criteria are reviewed by fellow analysts, the chief investment officer, and the portfolio managers. The peer review process involves the entire investment team. Each security is discussed to ensure that it fits in with the firm’s philosophy and to quantify the reasons and the time horizon for the investment. A prime consideration is to determine fundamental issues that could prompt revaluation of buy candidates.

For Bernstein the process starts with a broad universe of all the companies in developed and emerging markets outside the U.S. They screen this universe with a proprietary quantitative return model to pinpoint the companies with the most attractive valuation and success attributes. The model derives an expected return for all companies on a daily basis, considering them both from a global industry- based perspective and a countrybased standpoint. The model includes valuation factors like price/cash earnings and price/book value, as well as success factors like return on equity and price momentum. The most attractively ranked stocks are then subject to fundamental research by company and industry analysts.