<PAGE> 1
VANGUARD
CONVERTIBLE
SECURITIES FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations
on June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were
marked by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES The founding investment principles of
wellington fund were, above all, conservative. The fund provided a broadly
diversified portfolio at a time when holding individual securities was the
conventional strategy. It incurred no debt in an era of high leverage that
would soon come back to haunt less cautious investors. And it was a "balanced"
fund--in fact, wellington is america's oldest balanced fund--with holdings from
each of the three basic financial asset classes: cash reserves, bonds, and
common stocks. In short, wellington fund was a staid investment in an era of
stock speculation that was to become, almost within moments, an era of
conservatism.
For Vanguard, these investment principles endure. "Balance" is
still our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD CONVERTIBLE SECURITIES FUND SEEKS A HIGH LEVEL OF CURRENT
INCOME WITH LONG-TERM CAPITAL APPRECIATION. THE FUND INVESTS IN A BROADLY
DIVERSIFIED PORTFOLIO COMPOSED PRIMARILY OF BONDS CONVERTIBLE INTO COMMON
STOCK, WITH AN EMPHASIS ON SMALL AND MEDIUM-SIZED COMPANIES.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Vanguard Convertible Securities Fund's ninth fiscal year, which ended
on November 30, 1994, was a turbulent period for the financial markets. On
balance, stock prices generally eased downward, and bonds took their worst
drubbing in recent memory.
In this challenging environment for financial assets, Vanguard
Convertible Securities Fund turned in a negative total return (capital change
plus income). Our -4.4% return was somewhat lower than that of our principal
competitive norm, the Goldman Sachs Convertible 100 Index, which fell -2.7%.
This table compares the Fund's return with the Convertible Index and the two
unmanaged benchmarks that we use as a proxy for the broad market environment:
for stocks, the Standard & Poor's 500 Composite Stock Price Index; for bonds,
the Lehman Aggregate Bond Index:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
November 30, 1994
- -----------------------------------------------------------
<S> <C>
VANGUARD CONVERTIBLE SECURITIES FUND -4.4%
- -----------------------------------------------------------
GOLDMAN SACHS CONVERTIBLE 100 INDEX -2.7%
- -----------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +1.0%
LEHMAN AGGREGATE BOND INDEX -3.1
- -----------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $12.89 per
share on November 30, 1993, and $10.94 on November 30, 1994, with the latter
figure adjusted to take into account the reinvestment of four quarterly income
dividends totaling $.53 per share from net investment income, and a
distribution of $.91 per share from net capital gains realized during fiscal
1993. At fiscal year end, the Fund's income yield was 5.4%.
THE FISCAL YEAR IN REVIEW
Fiscal 1994 was, in a sense, a particularly "seasonal" year for common
stock prices. They rose last winter, tumbled in the early spring, recovered
during the summer, and fell again in the autumn. On balance, the price of the
Standard & Poor's 500 Index edged downward from 462 when the year began to 454
at year end. The Index's positive total return, then, was accounted for
entirelyby the dividends it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. A year ago,
stocks with smaller market capitalizations were ascendant over stocks with
large market capitalizations (which dominate the Standard & Poor's 500 Index).
This year, large cap equities led the way, if by a far more modest margin. So,
just as last year redounded to the benefit of more aggressive small cap
investors, this past year redounded to the benefit of investors in larger, more
conservative equities.
If the performance of the stock market was "so-so" during the past
year, nothing that gentle could be said about the bond market. The yield on
long-term corporate bonds ("AA utilities") rose from 7.2% to 8.8% during the
fiscal year, engendering a price decline of -17%. Yields on short-term and
intermediate-term bonds also rose sharply; however, because of their shorter
maturities, price declines were much smaller. This rising rate environment was
surely a major factor in dampening the return on stocks.
(continued)
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has acted
to "tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
The chart above compares the cumulative returns on stocks and bonds
during the past five years. It reflects the fact that during this
period--essentially the first half of the decade of the 1990s--both investment
classes provided annual rates of return that were comparable (stocks +8.9% per
year; bonds +7.6% per year). While stocks have been the more volatile asset
class over the longer term, there can be extended periods in which bonds carry
higher risks than stocks. There is, however, some tendency for the two
securities markets to fluctuate independently (as exemplified in 1990 and
1994). This tendency suggests that, over time, a diversified portfolio of
convertible securities should exhibit a level of volatility that falls
somewhere between stocks and bonds.
THE FUND IN FISCAL YEAR 1994
As noted at the outset, the total return earned by Vanguard Convertible
Securities Fund during fiscal 1994 took us into negative territory. However,
coming after our solid return of +13.9% in fiscal 1993, this dip hardly seems
disabling. Of course, investors entrust their money to a mutual fund with the
expectation of seeing their investment grow in value, and we clearly did not
meet that objective over the past twelve months.
In our Annual Report for fiscal 1993, we were pleased to be able to
report the solid margin the Fund had achieved over the Standard & Poor's 500
Index (+13.9% versus +10.1%). We did, however, give credit where credit was
due, noting that our advantage was largely related to "the fine performance of
the bond market" and "our heavy exposure to smaller capitalization stocks, which
led their large-capitalization cousins." Unfortunately, as often happens in the
uncertain world of investing, last year's "credit" became this year's "debit."
During fiscal 1994, interest rates turned upwards and small cap stocks moved
from leaders to laggards, impeding our return relative to the Standard & Poor's
500 Index (-4.4% for the Fund versus +1.0% for the Index).
Although we have typically compared our Fund to the Standard & Poor's
500 Index, it seems to me that this Index is not a particularly good proxy for
our Fund--or any convertible securities fund, for that matter. The Standard &
Poor's Index is dominated by the common stocks of the largest corporations in
America; convertible securities, on the other hand, have some bond-like
characteristics (higher interest rate sensitivity and higher yields) and some
stock-like characteristics (greater growth potential and price volatility).
Overall, convertibles exhibit a risk profile
2
<PAGE> 5
that is considerably more muted than that of stocks. What is more, since
convertibles represent a relatively attractive financing alternative, they
tend to be concentrated in the smaller cap segment of the market.
We believe that the most representative barometer of our Fund's
performance is the unmanaged Goldman Sachs Convertible 100 Index--which
includes the 100 largest convertible issues and has a total market value of $27
billion--and the average convertible securities mutual fund. During fiscal
1994, the Fund's decline was somewhat more than the -2.7% drop for the Goldman
Sachs Index, and about twice the -2.2% dip experienced by the average
convertible securities fund.
Our shortfall relative to the average convertible securities fund was,
in a sense, disappointing, but it hardly seems surprising, given the disparity
in the way that our Fund "goes about its work" compared to the average
convertible securities fund. Our Fund is essentially the only "pure"
convertible securities fund. While most competitive funds hold a dominant
position in convertibles, they dedicate a significant portion of their assets
to common stocks, preferred stocks, and bonds. Other convertible funds also
tend to maintain a larger position in cash reserves, which gives them a boost
during a market decline (as occurred in 1994), even as it hinders their
performance during a market upturn. This table exemplifies the disparities in
portfolio composition:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Percentage of Net Assets
November 30, 1994
-----------------------------------------
Portfolio Vanguard Convertible Average Convertible
Diversification Securities Fund Securities Fund
- -----------------------------------------------------------
<S> <C> <C>
CONVERTIBLES 88% 67%
PREFERREDS -- 3
COMMON STOCKS 4 9
BONDS -- 8
CASH 8 13
---- ----
TOTAL 100% 100%
- -----------------------------------------------------------
</TABLE>
Our portfolio also differs from the competitive funds in two other
respects. First, our adviser emphasizes relatively smaller growth companies;
indeed, nearly 50% of the Fund's holdings are in companies having a market
capitalization of less than $2 billion. Second, the overall credit quality of
our portfolio tends to be somewhat higher than that of our competitors. These
two differences should result in our Fund providing a lower income yield to
investors; however, our low expense ratio relative to other convertible
securities funds (0.73% of average net assets for the Fund versus 1.47% for our
peer group) allows us to offer a higher-quality portfolio and a higher net
yield. At fiscal year end, our 5.4% net yield compared with 4.5% for the
competitive funds.
A LONGER-TERM PERSPECTIVE
We would emphasize that, while a mutual fund's results during a single
year are important to consider, the most critical factor in evaluating a mutual
fund is its long-term record. The table that follows and the chart on page 4
show the total returns earned during Vanguard Convertible Securities Fund's
lifetime, beginning on June 30, 1986, compared with our two benchmark
standards:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Total Returns
--------------------
June 30, 1986, to
November 30, 1994
--------------------
Average
Cumulative Annual
- ---------------------------------------------------------
<S> <C> <C>
VANGUARD CONVERTIBLE SECURITIES FUND +87.4% +7.7%
- ---------------------------------------------------------
AVERAGE CONVERTIBLE SECURITIES FUND +80.1% +7.2%
GOLDMAN SACHS CONVERTIBLE INDEX +83.1 +7.4
- ---------------------------------------------------------
</TABLE>
You may have noticed that we omitted the results of the Standard & Poor's 500
Index, which have typically been presented in this comparison. This Index, for
reasons outlined earlier in this letter, does not, in our view, represent a
fair standard for a convertible securities fund. The average annual return for
the Index during the period illustrated was +10.8%.
These results, of course, should not be considered a precursor of
either absolute or relative future returns, which may be better or worse than
those of the past.
The similarity in relative returns is rather striking (and makes the
chart difficult to read!). During our lifetime (now more than eight years), the
Fund achieved an annual rate of return of +7.7%, just above the +7.4% return
achieved by the Goldman Sachs Convertible Index and the +7.2% return achieved
by the average convertible securities fund.
(continued)
3
<PAGE> 6
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1994
- --------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE SECURITIES FUND -4.35% +9.57% +7.74%
AVERAGE CONVERTIBLE FUND -2.22 +8.83 +7.23
GOLDMAN SACHS CONVERTIBLE INDEX -2.71 +8.60 +7.45
</TABLE>
* Inception: June 17, 1986. Performance data begins on June 30, 1986, to show
comparative data.
Note: Past performance is not indicative of future performance.
While our ability to outperform our convertible fund peer group is a
worthy accomplishment, we would note that our advantage (and then some) arises
from the competitively low expenses we incur. In fact, our expense ratio
averaged some 0.80% annually during the period, about one-half the 1.50%
expense ratio incurred by the average convertible fund. This favorable "spread"
should be sustainable in the years ahead. However, it remains incumbent on Desai
Capital Management, our investment adviser, to surpass a fairly chosen
competitive group on a gross return basis, thereby further enhancing our
"natural" expense advantage.
I should note that the returns achieved by our peers for their
shareholders during this period are significantly overstated in the chart. All
major statistical services calculate fund returns without taking sales charges
into account. (We're not sure why!) Such a practice suggests that all
convertible securities funds are "no load" funds, when in fact only two of the
nine convertible securities funds in operation during this period (including,
of course, Vanguard Convertible Securities Fund) meet this definition. Thus,
investors in our Fund have enjoyed an even larger margin of advantage over the
competition than the chart would suggest.
IN SUMMARY
In my letter one year ago, after the Fund's highly successful fiscal
1993, I warned both that "the stock market is highly valued today," and that
"with yields on long-term bonds now at their lowest levels in nearly a quarter
century, some retracement is certainly possible."
As it turned out, both warnings were timely. But with fiscal 1995 now
upon us, the probabilities seem to suggest that the bond market will be less
volatile in the coming year, and that the worst of the recent rate increase may
be behind us. If so, a better environment for convertible securities--at least
in relative terms--would lie ahead. However, with the stock market remaining
highly valued on a fundamental basis, the equity orientation of convertibles
is apt to engender continuing volatility.
4
<PAGE> 7
It is worth reemphasizing that investing in the financial markets is
risky. And investors who own convertible securities must face the vicissitudes
of both the stock market and the bond market. To be sure, the greatest risk is
faced by short-term investors who react to transitory market trends. The lowest
risk and the highest rewards--at least in the past--have been achieved by
long-term investors who have "stayed the course" with a sound investment
approach that is consistent with their own objectives.
For our part, we assure you that we, too, intend to stay the course
with the consistent objectives and policies that we have established for
Vanguard Convertible Securities Fund. And, we will do our best to earn the
trust you have placed in us.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
December 20, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE CHAIRMAN'S LETTER
IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
---------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD CONVERTIBLE SECURITIES FUND 6/17/86 +0.46% +9.54% +8.26% +5.72% +2.54%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
For the fiscal year ended, November 30, 1994, Vanguard Convertible Securities
Fund achieved a disappointing total return of -4.4%, due primarily to a sharp
reduction in convertible valuations tied to the interest rate climb beginning
early in 1994. Over longer periods of time, our portfolio returns have been
ahead of the average convertible securities mutual fund and the Goldman Sachs
Convertible 100 Index.
PORTFOLIO ACTIVITY
Trading activity was significant during the fiscal year ended November
30, 1994. We took advantage of the market strength early in the period to
reduce or eliminate higher risk or disappointing holdings, while establishing or
adding to positions in low-risk convertibles issued primarily by larger,
well-positioned companies. A total of 18 companies were added to the portfolio,
while 21 were eliminated.
PORTFOLIO CHARACTERISTICS
We continue to favor high-quality companies with above-average earnings
growth prospects. We estimate that the earnings growth inherent in the
portfolio will remain at a high level in the coming year, in sharp contrast to
decelerating growth for the S&P 500 Index companies. Despite a significant
differentiation with respect to expected earnings growth, the companies in our
portfolio sell at approximately the same valuation as the market, based on 1995
projected price-earning ratios. Factoring in the exceptionally low 16%
conversion premium, our holdings now carry the lowest absolute and relative
valuation levels since November 1990. Although rising interest rates could
continue to dampen valuations, our holdings should capture much of any
potential upside in the market while providing substantial protection should
market weakness continue.
We have investments in nine industry groups, spanning the breadth of
the economy. Our largest areas of concentration are consumer cyclical and
health care. The quality of the portfolio has increased significantly in recent
months; more than 47% of net assets is either in cash or in investment-grade
securities (BAA or higher), as compared with 41% six months ago.
CURRENT ENVIRONMENT AND FUTURE PLANS
Although there has been continued improvement in the economy, the stock
market has resumed its correction as investors anticipate that interest rates
will continue to rise until the economy slows down. Cyclical companies have
been particularly impacted; growth stocks, on the other hand, have begun to
outperform so long as their earnings remain intact. Given the focus of our
portfolio, this is good news.
Unfortunately good relative performance does not necessarily translate
into good absolute performance in an environment in which fixed-income
securities look increasingly compelling relative to stocks and convertibles. We
will therefore continue to be cautious in our securities selection and seek to
maintain or improve portfolio quality.
Despite investor concern about overheating, the American economy is
still growing, and we, as a nation, are more competitive in the global
marketplace than at any time in the past decade. This macroeconomic
underpinning adds to our conviction that a focus on well-managed, rapidly
growing companies should yield attractive long-term returns. The relatively
low valuation of our holdings further fuels our optimism that our portfolio is
well positioned for the future.
Respectfully,
Rohit M. Desai
Desai Capital Management, Incorporated
December 16, 1994
6
<PAGE> 9
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment
in Vanguard Convertible Securities Fund for the period from June 30, 1986, to
November 30, 1994. During the period illustrated, the prices of convertible
stocks and bonds fluctuated widely; these results should not be considered a
representation of the dividend income or capital gain or loss that may be
realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ------------------------------------------------------------------------------------------------------------------------------------
Value with Income V. Convertible Securities
Year Ended Net Asset Income Capital Gains Dividends & Capital -------------------------- Goldman Sachs
November 30 Value Dividends Distributions Gains Reinvested Capital Income Total Convertible
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (6/86) $10.00 -- -- $10.00 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1986 9.80 $0.17 -- 9.98 - 2.2% +1.8% - 0.4% + 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
1987 7.94 0.51 -- 8.50 -19.0 +4.2 -14.8 - 5.1
- ------------------------------------------------------------------------------------------------------------------------------------
1988 8.71 0.56 $0.12 10.10 +11.4 +7.4 +18.8 +16.4
- ------------------------------------------------------------------------------------------------------------------------------------
1989 9.64 0.57 -- 11.89 +10.7 +7.0 +17.7 + 9.4
- ------------------------------------------------------------------------------------------------------------------------------------
1990 8.07 0.56 -- 10.59 -16.3 +5.4 -10.9 -12.8
- ------------------------------------------------------------------------------------------------------------------------------------
1991 9.82 0.55 -- 13.68 +21.7 +7.5 +29.2 +24.9
- ------------------------------------------------------------------------------------------------------------------------------------
1992 11.77 0.53 -- 17.24 +19.9 +6.1 +26.0 +21.8
- ------------------------------------------------------------------------------------------------------------------------------------
1993 12.89 0.47 -- 19.63 + 9.5 +4.4 +13.9 +17.0
- ------------------------------------------------------------------------------------------------------------------------------------
1994 10.94 0.53 0.91 18.78 - 8.5 +4.1 - 4.4 - 2.7
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +87.4% +83.1%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURN + 7.7% + 7.4%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted to include reinvestment of income dividends and any capital gains
distributions both for the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
7
<PAGE> 10
FINANCIAL STATEMENTS
November 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (62.7%)
- ----------------------------------------------------------
BASIC MATERIALS (4.5%)
Albany International
5.25%, 3/15/02 $ 1,500 $ 1,283
Inco Ltd.
5.75%, 7/1/04 6,000 6,570
---------
GROUP TOTAL 7,853
---------
- ----------------------------------------------------------
CAPITAL GOODS AND
CONSTRUCTION (4.6%)
Cemex
4.25%, 11/1/97 2,000 2,070
Interface, Inc.
8.00%, 9/15/13 2,750 2,447
Varlen Corp.
6.50%, 6/1/03 3,500 3,552
---------
GROUP TOTAL 8,069
---------
- ----------------------------------------------------------
CONSUMER CYCLICAL (19.8%)
Comcast Corp.
3.375%, 9/9/05 6,700 5,460
Cooker Restaurant Corp.
6.75%, 10/1/02 1,884 1,187
Guilford Mills, Inc.
6.00%, 9/15/12 4,450 3,827
Home Depot
4.50%, 2/15/97 7,000 8,540
Michael Stores
4.75%, 1/15/03 2,550 2,831
Reliance Industries
3.50%, 11/3/99 500 615
Rogers Communications, Inc.
2.00%, 11/26/05 10,050 5,427
Sholodge, Inc.
7.50%, 11/1/04 1,000 1,080
Staples
5.00%, 11/1/99 5,000 5,775
---------
GROUP TOTAL 34,742
---------
- ----------------------------------------------------------
ENERGY (6.1%)
Amoco Canada Petroleum Ltd.
7.375%, 9/1/13 4,500 5,355
Noble Affiliates, Inc.
4.25%, 11/1/03 2,000 1,815
Pennzoil Co.
(Convertible into Chevron)
6.50%, 1/15/03 3,250 3,591
---------
GROUP TOTAL 10,761
---------
- ----------------------------------------------------------
FINANCIAL (7.1%)
Banamex
(Convertible into Banacci)
Euro 7.00%, 12/15/99 3,250 3,510
Bangkok Bank
3.25%, 3/3/04 1,000 890
Developers Diversified Realty
7.00%, 8/15/99 4,000 3,680
Industrial Credit and Investment
2.50%, 3/3/00 1,000 790
Liberty Property Trust
8.00%, 7/01/01 4,000 3,600
---------
GROUP TOTAL 12,470
---------
- ----------------------------------------------------------
HEALTH CARE (8.3%)
Chiron Corp.
1.90%, 11/17/00 2,500 1,787
Intergrated Health
6.00%, 01/01/03 6,500 8,060
Vencor
6.00%, 10/01/02 4,250 4,718
---------
GROUP TOTAL 14,565
---------
- ----------------------------------------------------------
TECHNOLOGY (8.0%)
Aspect Telecommunications
5.00%, 10/15/03 2,000 1,945
General Instrument
5.00%, 6/15/00 1,800 2,421
Motorola, Inc.
0.00%, 9/27/13 6,000 4,193
SynOptics Communications, Inc.
5.25%, 5/15/03 6,250 4,625
Telekom Malaysia Bhd.
4.00%, 9/29/04 1,000 920
---------
GROUP TOTAL 14,104
---------
- ----------------------------------------------------------
TRANSPORT SERVICES (3.4%)
Delta Air Lines, Inc.
3.23%, 6/15/03 8,500 5,908
---------
- ----------------------------------------------------------
UTILITIES (.9%)
Dow Chemical
(Convertible into
Magma Power Co.)
5.75%, 4/1/01 1,500 1,478
---------
- ----------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $113,162) 109,950
- ----------------------------------------------------------
CONVERTIBLE PREFERRED
STOCKS (25.0%)
- ----------------------------------------------------------
Shares
------
Basic Materials (3.5%)
Newmont Mining $2.75 50,000 2,669
Reynolds Metals $3.31 75,000 3,534
---------
GROUP TOTAL 6,203
---------
- ----------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------
<S> <C> <C>
CONSUMER CYCLICAL (3.4%)
Tanger Factory Outlet $1.575 52,500 $ 1,037
TJX Co., Inc. $3.125 120,000 4,980
---------
GROUP TOTAL 6,017
---------
- ----------------------------------------------------------
CONSUMER STAPLES (3.1%)
Corning Glass $3.00 115,000 5,434
---------
- ----------------------------------------------------------
ENERGY (1.3%)
Valero Energy $3.125 50,000 2,300
---------
- ----------------------------------------------------------
FINANCIAL (6.9%)
Banc One Corp. $3.50 120,000 6,195
Merryland and
Investments, Inc. $1.75 42,500 1,041
Northern Trust $3.125 100,000 4,850
---------
GROUP TOTAL 12,086
---------
- ----------------------------------------------------------
TECHNOLOGY (3.0%)
General Motors EDS Class E $3.25 95,000 5,284
---------
- ----------------------------------------------------------
TRANSPORT SERVICES (2.8%)
Arkansas Best 5.75% 120,000 4,890
---------
- ----------------------------------------------------------
UTILITIES (1.0%)
Western Gas Resources $2.625 50,000 1,700
---------
- ----------------------------------------------------------
TOTAL CONVERTIBLE
PREFERRED STOCKS
(Cost $51,145) 43,914
- ----------------------------------------------------------
COMMON STOCKS (3.6%)
- ----------------------------------------------------------
*Bay Networks 50,750 1,300
Taubman Co. REIT 318,400 3,144
Urban Shopping Centers REIT 100,000 1,950
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $7,646) 6,394
- ----------------------------------------------------------
TEMPORARY CASH INVESTMENT (8.0%)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.75%, 12/1/94
(Cost $13,999) $13,999 13,999
- ----------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $185,952) 174,257
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- ----------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.7%)
- ----------------------------------------------------------
Other Assets-Note C $ 3,155
Liabilities (1,946)
---------
1,209
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 16,031,792 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $175,466
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $10.94
==========================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT NOVEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $180,770 $11.28
Undistributed Net
Investment Income 3,436 .21
Accumulated Net
Realized Gains 2,955 .18
Unrealized Depreciation
of Investments--Note D (11,695) (.73)
- ----------------------------------------------------------
NET ASSETS $175,466 $10.94
- ----------------------------------------------------------
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1994
(000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends............................................................ $ 2,080
Interest............................................................. 8,406
- -----------------------------------------------------------------------------------------------------------------------
Total Income................................................ 10,486
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B...................................... 749
The Vanguard Group--Note C
Management and Administrative..................................... $564
Marketing and Distribution........................................ 41 605
----
Taxes (other than income taxes)...................................... 18
Custodian's Fees..................................................... 10
Auditing Fees........................................................ 6
Shareholders' Reports................................................ 28
Annual Meeting and Proxy Costs....................................... 5
Directors' Fees and Expenses......................................... 1
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses.............................................. 1,422
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................... 9,064
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD ...................................................... 3,025
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES ................................ (21,028)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations..... $ (8,939)
=======================================================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
NOVEMBER 30, 1994 November 30, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE)IN NET ASSETS
OPERATIONS
Net Investment Income................................................. $ 9,064 $ 7,911
Realized Net Gain..................................................... 3,025 15,453
Change in Unrealized Appreciation (Depreciation)...................... (21,028) (559)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations.................................... (8,939) 22,805
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income................................................. (8,796) (6,563)
Realized Net Gain..................................................... (14,366) --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions............................................. (23,162) (6,563)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A............................... (80) 526
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular................................................... 21,779 66,598
--In Lieu of Cash Distributions............................. 20,966 5,743
--Exchange.................................................. 32,328 97,796
Redeemed --Regular................................................... (18,262) (22,712)
--Exchange.................................................. (51,636) (81,509)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions.................... 5,175 65,916
- -----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)....................................... (27,006) 82,684
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year..................................................... 202,472 119,788
- -----------------------------------------------------------------------------------------------------------------------
End of Year (3)....................................................... $175,466 $202,472
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income........................................... $.53 $.47
Realized Net Gain............................................... $.91 --
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued.......................................................... 4,683 13,733
Issued in Lieu of Cash Distributions............................ 1,812 480
Redeemed........................................................ (6,175) (8,681)
- -----------------------------------------------------------------------------------------------------------------------
320 5,532
- -----------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income............................. $ 3,436 $ 3,248
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................. $12.89 $11.77 $9.82 $8.07 $9.64
------- -------- ------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income............................. .53 .56 .56 .53 .57
Net Realized and Unrealized Gain (Loss)
on Investments................................. (1.04) 1.03 1.92 1.77 (1.58)
------- -------- ------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS ........... (.51) 1.59 2.48 2.30 (1.01)
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............. (.53) (.47) (.53) (.55) (.56)
Distributions from Realized Capital Gains......... (.91) -- -- -- --
------- -------- ------- -------- --------
TOTAL DISTRIBUTIONS ........................ (1.44) (.47) (.53) (.55) (.56)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ........................ $10.94 $12.89 $11.77 $9.82 $8.07
=======================================================================================================================
TOTAL RETURN ........................................ -4.35% +13.87% +26.01% +29.25% -10.95%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions)................... $175 $202 $120 $55 $44
Ratio of Expenses to Average Net Assets.............. .73% .71% .85% .81% .88%
Ratio of Net Investment Income to
Average Net Assets................................ 4.68% 4.44% 4.80% 5.72% 6.35%
Portfolio Turnover Rate.............................. 52% 81% 55% 57% 55%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Vanguard Convertible Securities Fund is registered under the Investment
Company Act of 1940 as a diversified open-end investment company. The Fund
invests primarily in convertible debt securities; the issuers' abilities to meet
these obligations may be affected by economic developments in their respective
industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for convertible securities are
based upon the latest quoted bid prices. Common stocks listed on an
exchange are valued at the latest quoted sales prices as of the close of
the New York Stock Exchange (generally 4:00 PM) on the valuation date.
Temporary cash investments are valued at cost which approximates market
value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is
unaffected by Fund share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government obligations.
Securities pledged as collateral for repurchase agreements are held by
the Fund's custodian bank until maturity of each repurchase agreement.
Provisions of each agreement ensure that the market value of this
collateral is sufficient in the event of default; however, in the event
of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Discounts on debt
securities purchased are amortized to interest income over the lives of
the respective securities.
B. Under the terms of a contract which expires June 15, 1995, the Fund
pays Desai Capital Management, Inc. an investment advisory fee calculated at an
annual percentage rate of average net assets. For the year ended November 30,
1994, the investment advisory fee represented an effective annual rate of .39
of 1% of average net assets.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
November 30, 1994, the Fund had contributed capital of $28,000 to Vanguard
(included in Other Assets), representing .1% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended November 30, 1994, the Fund made purchases of
$93,830,000 and sales of $104,975,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At November 30, 1994, unrealized depreciation for financial reporting and
Federal income tax purposes aggregated $11,695,000, of which $4,818,000 related
to appreciated securities and $16,513,000 related to depreciated
securities.
13
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Convertible Securities Fund
In our opinion, the accompanying statement of net assets and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Convertible Securities Fund (the "Fund") at November 30, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1994, by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 30, 1994
14
<PAGE> 17
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD CONVERTIBLE SECURITIES FUND, INC.
Corporate shareholders should note that for the fiscal year ended November
30, 1994, 21.4% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
15
<PAGE> 18
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific
Tea Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper
Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer
of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Company, Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of
The Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
16
<PAGE> 19
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent
with each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure
of risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is
unrepeatable and investment fads that today, as yesterday, will come and go. The
new marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values
was brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of the
benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at the
fairest financial terms available. We believe that the unique Vanguard structure
"promotes a healthy and viable mutual fund complex within which each Fund can
better prosper; enables the Funds to realize substantial savings from advisory
fee reductions; promotes savings from economies of scale; and provides the Funds
with direct and conflict-free control over distribution functions." We are not
alone in this belief. Indeed, the quotation is taken verbatim from the unanimous
decision of the U.S. Securities and Exchange Commission when, in 1981, it
approved our application for the structure under which we operate today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q820-11/94
<PAGE> 21
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart comparing the indexed value of the Standard & Poor's 500
Stock Index and the Lehman Aggregate Bond Index for the fiscal years 1990
through 1994 appears at the top left of page two.
A cumulative performance line chart for the period June 30, 1986, to
November 30, 1994 appears at the top of page four.
A running head featuring a map and telescope appears on page six.
A running head featuring a lantern appears on page seven.
A running head featuring a log book and pen appears on pages eight
through fifteen.
A running head featuring a compass appears on page sixteen.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
