<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the six months ended May 31, 1995, the first half of the fiscal year for
Vanguard Convertible Securities Fund, both the stock market and the bond market
surged ahead, as interest rates headed sharply lower. The strong financial
markets boosted the Fund's absolute return to a solid +6.8%, more than
recouping the -4.4% decline in fiscal 1994. Nonetheless, our result was a bit
short of the +9.0% return of the average convertible securities fund.
The table below presents Vanguard Convertible Securities Fund's total
return (capital change plus income) for the six-month period compared to the
results of the Goldman Sachs Convertible 100 Index and the two unmanaged
benchmarks that we use as competitive measures: the Standard & Poor's 500
Composite Stock Price Index and the Lehman Aggregate Bond Index:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Total Return
------------------
Six Months Ended
May 31, 1995
- ----------------------------------------------------------------------
<S> <C>
Vanguard Convertible Securities Fund + 6.8%
- ----------------------------------------------------------------------
Goldman Sachs Convertible 100 Index +13.4%
- ----------------------------------------------------------------------
Standard & Poor's 500 Stock Index +19.2%
Lehman Aggregate Bond Index +11.4
- ----------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $10.94 per share on
November 30, 1994, and $11.18 on May 31, 1995, with the latter figure adjusted
to take into account the reinvestment of our dividend payments totaling $.29
per share from net investment income, and a distribution of $.18 per share from
net capital gains realized during 1994. Based on the net asset value on May 31,
1995, the Fund's current yield is 4.8%.
SIX-MONTH OVERVIEW
As the fiscal year commenced, a precipitous decline in the general level of
interest rates helped to reverse the fortunes of stock and bond investors, as
lower yields resulted in substantial gains in both the stock and bond markets.
In the wake of repeated interest rate increases by the Federal Reserve during
1994, the long-term U.S. Treasury bond yield peaked in November 1994 at 8.2%.
Since then, the impact of the cumulative rate hikes has raised concerns about
dampening future economic growth, as the increased cost of borrowing filters
through the economy. However, a 160-basis-point drop in interest rates, to 6.6%
at the end of May, has engendered significant increases in bond prices and
revived hopes of a successfully navigated "soft landing."
Since the inception of Convertible Securities Fund in June 1986, our
performance has outpaced the average convertible securities fund by a narrow
margin of 20 basis points annually (+8.1% for the Fund versus +7.9% for the
average convertible fund). Given the Fund's emphasis on small capitalization
stocks, our performance relative to the average competitor often is marked by
interim periods of both outperformance and underperformance. As noted in last
year's Annual Report, during periods in which the Fund provides superior
relative returns, the emphasis on smallcap stocks has usually been a major
contributing factor to our success.
As it turns out, the past six months witnessed a dramatic divergence in
the returns of small stocks versus large stocks. The +19.2% return of the S&P
500 Index (representing large companies) significantly outdistanced the +11.7%
return of the Russell 2000 Index (a common proxy for smaller stocks). This
difference accounts for much of the Fund's shortfall relative to the S&P 500
Index. Nonetheless, recent advances by small capitalization stocks give an
indication that conditions have shifted to an environment which once again
favors our adviser's bias towards smaller companies.
(continued)
1
<PAGE> 2
IN SUMMARY
The rapid appreciation of stocks during this year's bull market has lifted the
prices of stocks of all stripes, as even the "worst" sectors of the market have
provided returns that are well into the positive territory. However, in the
cyclical world of investing, we encourage discipline and patience in the search
for successful long-term rates of return.
I look forward to reporting to you on the full 1995 fiscal year in our
Annual Report, six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
June 12, 1995
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 MARCH 31, 1995) 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 +1.83% +10.42% +7.92% +5.70% +2.22%
</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.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISER
We are pleased to report on the investment activity of the Vanguard Convertible
Securities Fund for the six months ended May 31, 1995. Although the Fund's
total return for the period was +6.8%, the disappointing relative performance
that began in early 1994 continued through most of the past six months. The
companies represented in our portfolio are, on the whole, showing excellent
operating results, but a contraction of their relative valuations and a
reduction of convertible premiums have been the primary causes of our
underperformance relative to equity indexes.
Our strategy has always been based on bottom-up investing in carefully
selected quality companies with outstanding long-term return potential. We
remain convinced that this strategy will provide superior long-term results,
and to date, the Fund has outperformed the average convertible fund since
inception. In recent weeks, we began to witness what could be the beginning of
a turnaround in our relative performance as concerns about a decelerating
economy caused investors to focus increasingly on the quality, non-cyclical
securities we favor in our selection process.
PORTFOLIO ACTIVITY
Investment activity resulted in the addition of eight companies to the
portfolio--American General, First Financial Management, Oasis Residential,
Office Depot, Inc., Security Capital Pacific, Sports & Recreation, Texas
Instruments, and WMX Technologies, all of which have attractive growth
prospects and modest valuations. Eight companies were eliminated, primarily
because of fundamental concerns. We now hold investments in 46 companies.
PORTFOLIO CHARACTERISTICS
We continue to emphasize high-quality companies with superior growth prospects.
As the economic cycle matures, earnings for large companies, as represented by
the Standard & Poor's 500 Index, are expected to show more modest growth while
our holdings are expected to continue to post strong earnings gains. Our
investments, on average, have a valuation comparable to that of the overall
market as represented by the S&P 500 Index, yet our growth expectations for the
portfolio's holdings are well above average. In the past, our portfolio has
tended to outperform when it had a valuation similar to the overall market and
S&P 500 earnings were decelerating. We believe that we are currently at the
beginning of such a period.
Our portfolio remains broadly diversified by industry. The most
significant change in industry weights during this period was the increase in
real estate company holdings. These securities continue to lag the market
despite excellent earnings growth and declining interest rates. We now have
investments in seven well-positioned real estate companies with high current
income and attractive risk/reward profiles.
CURRENT ENVIRONMENT AND FUTURE PLANS
The stock market has continued the dramatic advance that began in late 1994,
fueled to a large extent by excellent corporate earnings and a rapid decline in
interest rates that continued through the end of the six-month period. At
current valuations, the market is increasingly vulnerable to both earnings
disappointments and any increase in interest rates.
We continuously seek to reduce the portfolio's vulnerability to market
corrections, adding when possible low-risk securities of well-positioned
companies while selling high-risk and disappointing investments. The bulk of
our holdings retain excellent growth potential even in a weakening economy and
have absolute and relative valuations in the lower half of their historical
range, so we are hopeful that they will provide attractive returns in an
increasingly uncertain economic environment.
Respectfully,
Rohit M. Desai
Desai Capital Management, Incorporated
June 15, 1995
3
<PAGE> 4
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 May
31, 1995. 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*
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Securities
Value with Income -------------------------- Goldman Sachs
November 30 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Convertible
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- -----------------------------------------------------------------------------------------------------------------------------------
<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 $0.12 0.56 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 0.91 0.53 18.78 - 8.5 +4.1 - 4.4 - 2.7
- ----------------------------------------------------------------------------------------------------------------------------------
1995 (5/31) 11.18 0.18 0.29 20.05 + 4.0 +2.8 + 6.8 +13.4
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +100.1% +107.7%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURN +8.1% +8.5%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes 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.
4
<PAGE> 5
FINANCIAL STATEMENTS
(unaudited)
May 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (61.6%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (5.4%)
Albany International
5.25%, 3/15/02 $ 3,560 $ 3,346
Inco Ltd.
5.75%, 7/1/04 5,400 5,738
---------
GROUP TOTAL 9,084
---------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (7.2%)
Cemex
4.25%, 11/1/97 2,000 1,510
Interface, Inc.
8.00%, 9/15/13 3,250 3,201
Varlen Corp.
6.50%, 6/1/03 3,500 3,710
WMX Technologies
2.00%, 1/24/05 4,600 3,772
---------
GROUP TOTAL 12,193
---------
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (17.2%)
Comcast Corp.
3.375%, 9/9/05 6,700 6,030
Guilford Mills Inc.
6.00%, 9/15/12 4,450 4,361
Michaels Stores
4.75%, 1/15/03 3,500 3,185
Office Depot, Inc.
0.00%, 12/11/07 1,500 1,110
0.00%, 11/1/08 2,000 1,160
Reliance Industries
3.50%, 11/3/99 1,250 1,363
Rogers Communications Inc.
2.00%, 11/26/05 10,050 5,125
ShoLodge, Inc.
7.50%, 11/1/04 1,300 1,125
Sports & Recreation
4.25%, 11/1/00 905 679
Staples
5.00%, 11/1/99 3,500 4,900
---------
GROUP TOTAL 29,038
---------
- --------------------------------------------------------------------------------
ENERGY (5.4%)
Amoco Canada Petroleum Ltd.
7.375%, 9/1/13 2,500 3,250
Noble Affiliates Inc.
4.25%, 11/1/03 2,000 1,890
Pennzoil Co.
(Convertible into Chevron)
6.50%, 1/15/03 3,250 3,965
---------
GROUP TOTAL 9,105
---------
- --------------------------------------------------------------------------------
FINANCIAL (8.1%)
Banamex
(Convertible into Banacci)
Euro 7.00%, 12/15/99 1,770 1,230
Developers Diversified Realty
7.00%, 8/15/99 5,500 5,308
First Financial Management
5.00%, 12/15/99 3,000 3,510
Industrial Credit and Investment
2.50%, 4/3/00 800 616
Liberty Property Trust
8.00%, 7/1/01 3,000 2,966
---------
GROUP TOTAL 13,630
---------
- --------------------------------------------------------------------------------
HEALTH CARE (5.5%)
Integrated Health Services
5.75%, 1/1/01 3,150 3,607
6.00%, 1/1/03 2,250 2,520
Vencor
6.00%, 10/1/02 2,650 3,286
---------
GROUP TOTAL 9,413
---------
- --------------------------------------------------------------------------------
TECHNOLOGY (12.8%)
Aspect Telecommunications
5.00%, 10/15/03 3,600 4,086
General Instrument
5.00%, 6/15/00 2,150 2,951
Motorola, Inc.
0.00%, 9/7/09 3,100 3,371
0.00%, 9/27/13 3,630 2,741
SynOptics Communications, Inc.
(Convertible into Bay Networks)
5.25%, 5/15/03 5,250 4,567
Texas Instruments
2.75%, 9/29/02 2,750 3,836
---------
GROUP TOTAL 21,552
---------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $102,474) 104,015
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (24.3%)
- --------------------------------------------------------------------------------
Shares
---------
BASIC MATERIALS (1.1%)
Reynolds Metals Co. $3.31 40,000 1,855
---------
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (3.6%)
TJX Co. Inc. $3.125 120,000 4,740
Tanger Factory Outlet $1.575 62,500 1,367
---------
GROUP TOTAL 6,107
---------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (3.1%)
Corning Glass $3.00 104,000 5,174
---------
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
ENERGY (2.0%)
Valero Energy $3.125 50,000 $ 2,369
Western Gas Resources $2.625 30,000 1,058
---------
GROUP TOTAL 3,427
---------
- --------------------------------------------------------------------------------
FINANCIAL (8.3%)
American General Series A $3.00 35,000 1,794
Banc One Corp. $3.50 50,000 3,012
Northern Trust $3.125 100,000 5,075
Oasis Residential $2.25 60,000 1,515
Security Capital Pacific $1.75 120,000 2,715
---------
GROUP TOTAL 14,111
---------
- --------------------------------------------------------------------------------
TECHNOLOGY (3.5%)
General Motors $3.25
(Convertible into General Motors
Class E (EDS)) 95,000 5,866
---------
- --------------------------------------------------------------------------------
TRANSPORT SERVICES (2.7%)
Arkansas Best $2.875 120,000 4,530
---------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $45,553) 41,070
- --------------------------------------------------------------------------------
COMMON STOCKS (8.5%)
- --------------------------------------------------------------------------------
* Bay Networks 81,750 2,974
Home Depot, Inc. 167,741 6,982
Taubman Co. REIT 223,400 2,150
Urban Shopping Centers REIT 100,000 2,175
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $15,081) 14,281
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (4.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.15%, 6/1/95
(Cost $8,305) $ 8,305 $ 8,305
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $171,413) 167,671
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and E 9,318
Liabilities--Note E (8,131)
---------
1,187
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 15,106,526 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $ 168,858
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 11.18
================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1995, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $ 170,838 $ 11.31
Undistributed Net
Investment Income 2,876 .19
Accumulated Net
Realized Losses (1,114) (.07)
Unrealized Depreciation
of Investments--Note D (3,742) (.25)
- --------------------------------------------------------------------------------
NET ASSETS $168,858 $11.18
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
May 31, 1995
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,599
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,246
- ------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 4,845
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . 334
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . $257
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . 19 276
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . 21
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 15
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 2
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . --
- ------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 655
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . 4,190
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . (1,203)
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . 7,953
- ------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . $10,940
========================================================================================================================
</TABLE>
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MAY 31, 1995 November 30, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,190 $ 9,064
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . (1,203) 3,025
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 7,953 (21,028)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 10,940 (8,939)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (4,575) (8,796)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . (2,866) (14,366)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (7,441) (23,162)
- ------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . . . . . (175) (80)
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . 6,003 21,779
--In Lieu of Cash Distributions . . . . . . . . . . . . . . 6,532 20,966
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . 5,680 32,328
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . (8,412) (18,262)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . (19,735) (51,636)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . (9,932) 5,175
- ------------------------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . . (6,608) (27,006)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . 175,466 202,472
- ------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,858 $ 175,466
========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $.29 $.53
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . $.18 $.91
- ------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,098 4,683
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 627 1,812
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,650) (6,175)
- ------------------------------------------------------------------------------------------------------------------------
(925) 320
- ------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . $ 2,876 $ 3,436
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
SIX MONTHS ENDED -------------------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $10.94 $12.89 $11.77 $9.82 $8.07 $9.64
------ ------ ------ ------- ------ -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .27 .53 .56 .56 .53 .57
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . .44 (1.04) 1.03 1.92 1.77 (1.58)
------ ------ ------ ------- ------ -------
TOTAL FROM INVESTMENT OPERATIONS . . . .71 (.51) 1.59 2.48 2.30 (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.29) (.53) (.47) (.53) (.55) (.56)
Distributions from Realized Capital Gains . . (.18) (.91) -- -- -- --
------ ------ ------ ------- ------ -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.47) (1.44) (.47) (.53) (.55) (.56)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $11.18 $10.94 $12.89 $11.77 $9.82 $8.07
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +6.81% -4.35% +13.87% +26.01% +29.25% -10.95%
- ------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $169 $175 $202 $120 $55 $44
Ratio of Expenses to Average Net Assets . . . . . .77%* .73% .71% .85% .81% .88%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 4.94%* 4.68% 4.44% 4.80% 5.72% 6.35%
Portfolio Turnover Rate . . . . . . . . . . . . . 51%* 52% 81% 55% 57% 55%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
9
<PAGE> 10
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, 1996, the Fund pays
Desai Capital Management, Inc. an investment advisory fee calculated at an
annual percentage rate of average net assets. For the six months ended May 31,
1995, 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
May 31, 1995, the Fund had contributed capital of $24,000 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 six months ended May 31, 1995, the Fund made purchases of
$40,856,000 and sales of $48,816,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At May 31, 1995, unrealized depreciation for financial reporting and Federal
income tax purposes aggregated $3,742,000, of which $8,330,000 related to
appreciated securities and $12,072,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at May 31, 1995,
was $3,954,000, for which the Fund had received cash collateral of $4,145,000.
10
<PAGE> 11
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 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
<TABLE>
<S> <C>
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
</TABLE>
11
<PAGE> 12
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 LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
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
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
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.
Q822-5/95
VANGUARD
CONVERTIBLE
SECURITIES FUND
SEMI-ANNUAL REPORT
May 31, 1995
