<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the first half of Vanguard Convertible Securities Fund's 1996 fiscal
year, which ended on May 31, the stock market continued its seemingly boundless
surge. The strong market helped boost the Fund's total return to +9.5%,
narrowly ahead of the +9.3% return on the average convertible securities mutual
fund.
The table below compares Vanguard Convertible Securities Fund's total
return (capital change plus reinvested dividends) for the six-month period with
that of the unmanaged Goldman Sachs Convertible 100 Index and the average
convertible securities fund, as well as those of the two benchmarks that we use
as market measures: for stocks, the Standard & Poor's 500 Composite Stock Price
Index, and for bonds, the Lehman Aggregate Bond Index:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN
--------------------
SIX MONTHS ENDED
MAY 31, 1996
- -----------------------------------------------------------------
<S> <C>
VANGUARD CONVERTIBLE SECURITIES FUND + 9.5%
- -----------------------------------------------------------------
GOLDMAN SACHS CONVERTIBLE 100 INDEX + 9.6%
AVERAGE CONVERTIBLE SECURITIES FUND + 9.3
- -----------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +11.8%
LEHMAN AGGREGATE BOND INDEX - 1.2
- -----------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $12.03 on November 30, 1995,
and $12.68 on May 31, 1996, with the latter figure adjusted to take into
account the reinvestment of our dividend payments totaling $.32 per share from
net investment income, and a distribution of $.14 per share from net capital
gains realized during 1995. Based on the net asset value on May 31, 1996, the
Fund's current yield was 3.2%.
THE PERIOD IN REVIEW
The stock market provided positive returns in each month of the period,
propelling market indexes to record after record. For the first six weeks of
the semi-annual period, stocks seemed to get a lift from falling interest
rates, including reductions in short-term rates by the Federal Reserve in
December and January. And yet, surprisingly, the market shrugged off the
subsequent sharp reversal in long-term interest rates. The yield on the 30-year
U.S. Treasury bond, which started the period at 6.1%, fell below 6% in January
before leaping upward to more than 7% by mid-May. In essence, both "good" and
"bad" economic news were interpreted as good news for stocks, suggesting that a
speculative spirit is abroad in the land.
The stock market's euphoria did not extend to the bond market, where
activity has been dominated by concern over the apparent strengthening of the
U.S. economy and the possibility of an increase in inflation. This
"decoupling'' of the stock and bond markets since late January raises the
question of whether the stock market has enough earnings growth momentum to
withstand the competition for investors' dollars that higher-yielding bonds
might provide.
THE FUND IN REVIEW
Convertible Securities Fund's +9.5% gain was in step with the +9.6% return on
the Goldman Index--a marked improvement over the Fund's 8.8% shortfall to the
Index in fiscal 1995. Relative to our average competitor, the Fund's
performance was moderately enhanced by our emphasis on small capitalization
stocks. The Fund's bias toward small-cap stocks has been a major differentiator
of our returns, sometimes adding to our interim relative returns, sometimes
detracting. On balance, over our first decade, that bias has proved modestly
negative. Large-cap stocks, represented by the Standard & Poor's 500 Index,
posted an average annual return of +14.0% in the ten-year period ended May 31,
1996, while small-cap stocks, represented by the Russell 2000 Index, provided
an average return of +10.9%.
Though small stocks got off to a slow start during the six-month
period--inching higher in December and falling slightly in January--they set a
blistering pace over the next four months. In fact, for the six months from
December through May, the +18.1% return of the Russell 2000 Index significantly
outdistanced the +11.8% return of the S&P 500 Index.
(continued)
1
<PAGE> 2
During the past twelve months, small stocks have posted a remarkable return of
+35.9%, compared with a return of +28.4% for large stocks. Nonetheless, it
remains to be seen how long investors' fervor for small stocks--and even stocks
in general--can continue.
A six-month period cannot provide an accurate gauge by which to judge
the results of any mutual fund. This is especially true when the period's
results seem to suggest that rising markets and solid returns are the norm.
Always bear in mind that the search for successful long-term returns demands
discipline and patience in the face of the ever-unpredictable nature of the
financial markets.
That said, as we write this letter, Vanguard Convertible Securities
Fund has completed a decade of operations. During this period, our return has
been slightly ahead of our competitive universe of funds (although by an amount
less than our expense ratio advantage) and slightly behind the unmanaged
Goldman Sachs Index. Given these results, your officers and directors are
currently reviewing the Fund's strategy and our adviser's implementation of
that strategy. We will report the results of our analysis to you later this
year.
We look forward to reporting to you in detail on the full 1996 fiscal
year in our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------
John J. Brennan
President
June 15, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE MESSAGE TO
SHAREHOLDERS IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE
ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1996) 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 +16.19% +12.57% +8.73% +5.65% +3.08%
</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 Vanguard Convertible
Securities Fund for the six months ended May 31, 1996. During the period, the
Fund had a total return of +9.5%, above competitive benchmarks for the past
three months and calendar year-to-date. Recent results have been driven by a
very strong equity environment, which has also resulted in a decline in
conversion premium as well as an increase in premium over investment value.
PORTFOLIO ACTIVITY
A total of six new positions were added to the portfolio during the period,
including such exciting growth companies as Greenfield Industries, Magna
International, Marriott International, Nabors Industries, Scholastic, and
Thermo Electron. Existing positions in Altera, American Travellers, and Softkey
International were increased. Thirteen positions were reduced during the period
and one--Michaels Stores--was eliminated.
PORTFOLIO CHARACTERISTICS
High-quality growth companies with superior earnings prospects remain our
primary focus. The spread between estimated profit growth for the S&P 500 and
for companies held in the Fund has widened over the past several months.
Currently, portfolio holdings are expected to see earnings growth of
approximately 14% on average in 1996 compared with less than 5% for the S&P
500. Nonetheless, our underlying stocks sell at a price/earnings ratio
comparable to that of the broad equity average. The Fund's conversion premium
of only 14% is less than the convertible universe average of roughly 20% and
the current yield on the Fund is 3.2%.
The portfolio remains broadly diversified across a wide array of
economic activity, but has important weightings in growth industries such as
technology, consumer products, and retailing. Companies with less than $2
billion in market capitalization constitute 39% of the portfolio's value and
40% of our assets comprise investment-grade securities (Baa or higher).
CURRENT ENVIRONMENT AND FUTURE PLANS
The past six months have been an extraordinarily bullish period for the equity
markets even though the bond market has been troubled from time to time. The
Fund's strategy of emphasizing earnings growth has been the right one for this
environment, and we will continue on this track. Market levels are of some
concern, however. Both the equity and convertible markets are up significantly,
and this suggests that investors need to focus a bit more on investment value
and downside protection. In this regard, the recent decision by the Federal
Reserve Board not to raise rates was comforting.
I am pleased to report that Thomas P. Larsen and Paul A. Blaustein
have been two recent additions to the portfolio management team. Tom has been
with our firm for nearly five years and has 25 years of investment experience.
Paul is another 25-year veteran who brings a wealth of experience to our team.
The management of the Fund will continue with Tom, Paul, and me all dedicating
our efforts to the task.
We are excited about the prospects for the Fund, and are satisfied
that our exposure to high-quality growth should continue to pay off.
Sincerely,
Rohit M. Desai
Desai Capital Management, Incorporated
June 13, 1996
3
<PAGE> 4
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD CONVERTIBLE SECURITIES FUND since inception through May 31, 1996.
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*
- -----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs
Convertible
Convertible Securities Fund Index
Value with Income ------------------------------- -------------
November 30 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (6/86) $10.00 -- -- $10.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1986 9.80 -- $.17 9.98 - 2.0% + 1.8% - 0.2% + 0.5%
- -----------------------------------------------------------------------------------------------------------------------------------
1987 7.94 -- .51 8.50 -19.0 + 4.2 -14.8 - 5.1
- -----------------------------------------------------------------------------------------------------------------------------------
1988 8.71 $.12 .56 10.10 +11.4 + 7.4 +18.8 +16.4
- -----------------------------------------------------------------------------------------------------------------------------------
1989 9.64 -- .57 11.89 +10.7 + 7.0 +17.7 + 9.4
- -----------------------------------------------------------------------------------------------------------------------------------
1990 8.07 -- .56 10.59 -16.3 + 5.4 -10.9 -12.8
- -----------------------------------------------------------------------------------------------------------------------------------
1991 9.82 -- .55 13.68 +21.7 + 7.5 +29.2 +24.9
- -----------------------------------------------------------------------------------------------------------------------------------
1992 11.77 -- .53 17.24 +19.9 + 6.1 +26.0 +21.8
- -----------------------------------------------------------------------------------------------------------------------------------
1993 12.89 -- .47 19.63 + 9.5 + 4.4 +13.9 +17.0
- -----------------------------------------------------------------------------------------------------------------------------------
1994 10.94 .91 .53 18.78 - 8.5 + 4.1 - 4.4 - 2.7
- -----------------------------------------------------------------------------------------------------------------------------------
1995 12.03 .18 .51 21.99 +11.9 + 5.2 +17.1 +25.9
- -----------------------------------------------------------------------------------------------------------------------------------
1996 (5/31) 12.68 .14 .32 24.08 + 6.7 + 2.8 + 9.5 + 9.6
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +140.8% +153.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +9.2% +9.8%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both 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
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
May 31, 1996
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (67.7%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (3.1%)
Inco Ltd.
5.75%, 7/1/04 $4,000 $ 5,010
----------
CAPITAL GOODS & CONSTRUCTION (7.9%)
Cemex SA
4.25%, 11/1/97 1,800 1,665
Thermo Electron Corp.
4.25%, 1/1/03 1,000 1,255
U. S. Filter Corp.
5.00%, 10/15/00 1,500 2,565
Varlen Corp.
6.50%, 6/1/03 3,000 3,030
WMX Technologies, Inc.
2.00%, 1/24/05 4,600 4,451
----------
SECTOR TOTAL 12,966
----------
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (18.1%)
Comcast Corp.
3.375%, 9/9/05 6,700 6,130
Guilford Mills, Inc.
6.00%, 9/15/12 3,500 3,430
Lowe's Cos.
3.00%, 7/22/03 2,000 2,610
Magna International Inc.
5.00%, 10/15/02 3,000 3,158
Marriott International Inc.
0.00%, 3/25/11 3,000 1,556
Office Depot Inc.
0.00%, 12/11/07 8,900 6,853
Price/Costco Inc.
5.50%, 2/28/12 1,100 1,114
Reliance Industries
3.50%, 11/3/99 1,420 1,470
Rogers Communications Inc.
2.00%, 11/26/05 300 158
Scholastic Corp.
5.00%, 8/15/05 1,400 1,456
ShoLodge, Inc.
7.50%, 11/1/04 1,300 1,209
Sports & Recreation Inc.
4.25%, 11/1/00 905 652
----------
SECTOR TOTAL 29,796
----------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (.9%)
Starbucks Corp.
4.25%, 11/1/02 1,200 1,509
----------
- --------------------------------------------------------------------------------
ENERGY (4.2%)
Nabors Industries Inc.
5.00%, 5/15/06 2,000 2,120
Pennzoil Co.
(Convertible into Chevron Corp.)
6.50%, 1/15/03 3,350 4,836
----------
SECTOR TOTAL 6,956
----------
- --------------------------------------------------------------------------------
FINANCIAL (9.6%)
American Travellers Corp.
6.50%, 10/1/05 2,200 3,548
Banamex
(Convertible into Banacci)
7.00%, 12/15/99 900 810
Developers Diversified Realty Corp.
7.00%, 8/15/99 4,500 4,477
First Financial
(Convertible into First Data Corp.)
5.00%, 12/15/99 2,700 5,042
Liberty Property Trust
8.00%, 7/1/01 1,850 1,933
----------
SECTOR TOTAL 15,810
----------
- --------------------------------------------------------------------------------
HEALTH CARE (3.7%)
Integrated Health Services Inc.
5.75%, 1/1/01 4,150 4,233
6.00%, 1/1/03 750 742
Tenet Healthcare Corp.
6.00%, 12/1/05 1,000 1,050
----------
SECTOR TOTAL 6,025
----------
- --------------------------------------------------------------------------------
TECHNOLOGY (20.2%)
Altera Corp.
5.75%, 6/15/02 1,100 1,254
Aspect Telecommunications Corp.
5.00%, 10/15/03 2,900 8,483
General Instrument Corp.
5.00%, 6/15/00 2,000 2,565
Motorola, Inc.
0.00%, 9/7/09 2,850 3,570
0.00%, 9/27/13 4,630 3,773
Silicon Graphics Inc.
0.00%, 11/2/13 6,000 3,195
Softkey International Inc.
5.50%, 11/1/00 1,600 1,360
SynOptics Communications, Inc.
(Convertible into Bay Networks, Inc.)
5.25%, 5/15/03 5,250 4,948
Texas Instruments, Inc.
2.75%, 9/29/02 3,060 4,131
----------
SECTOR TOTAL 33,279
----------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $98,549) 111,351
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (16.8%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (3.2%)
International Paper $2.625 95,000 $ 4,370
Reynolds Metals Co. $3.31 20,000 950
--------
SECTOR TOTAL 5,320
--------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.6%)
Greenfield Industries $3.00 16,250 918
--------
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (5.5%)
Houghton Mifflin
(Convertible into Inso) 6.00% 15,000 1,605
TJX Co. Inc. $3.125 90,000 6,075
Tanger Factory Outlet $1.575 62,500 1,359
--------
SECTOR TOTAL 9,039
--------
- --------------------------------------------------------------------------------
ENERGY (1.8%)
Enron Corp. 6.25% 40,000 960
Valero Energy Corp. $3.125 35,000 1,978
--------
SECTOR TOTAL 2,938
--------
- --------------------------------------------------------------------------------
FINANCIAL (4.2%)
Oasis Residential Inc. $2.25 60,000 1,500
Security Capital Industrial
Trust Series A $1.75 40,000 935
Security Capital Pacific
Trust Series A $1.75 165,000 4,517
--------
SECTOR TOTAL 6,952
--------
- --------------------------------------------------------------------------------
TRANSPORT & SERVICES (1.5%)
Arkansas Best Corp. 5.75% 80,000 2,500
--------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $27,239) 27,667
- --------------------------------------------------------------------------------
COMMON STOCKS (13.3%)
- --------------------------------------------------------------------------------
CONSUMER CYCLICAL (4.8%)
Home Depot, Inc. 155,000 7,924
--------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (.3%)
* Starbucks Corp. 20,000 538
--------
- --------------------------------------------------------------------------------
FINANCIAL (5.1%)
Northern Trust Corp. 93,432 5,115
Security Capital Industrial Trust 55,000 949
Taubman Centers, Inc. REIT 80,000 840
Urban Shopping Centers, Inc. REIT 60,000 1,425
--------
SECTOR TOTAL 8,329
--------
- --------------------------------------------------------------------------------
TECHNOLOGY (3.1%)
* Bay Networks, Inc. 50,000 1,450
General Motors Corp. Class E 60,000 3,383
* Softkey International, Inc. 10,000 246
--------
SECTOR TOTAL 5,079
--------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $18,127) 21,870
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.5%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.33%, 6/3/96
(Cost $2,460) $2,460 2,460
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $146,375) 163,348
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and E 6,268
Liabilities--Note E (5,044)
--------
1,224
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 12,976,200 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $164,572
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.68
================================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
PAID IN CAPITAL $146,060 $11.25
UNDISTRIBUTED NET
INVESTMENT INCOME 1,574 .12
ACCUMULATED NET
REALIZED LOSSES (35) --
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE D 16,973 1.31
- --------------------------------------------------------------------------------
NET ASSETS $164,572 $12.68
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
May 31, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,014
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,461
- ---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,475
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . 287
The Vanguard Group--Note C . . . . . . . . . . . . . . . . . . . . . . .
Management and Administrative . . . . . . . . . . . . . . . . . . . . $217
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . 16 233
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . 4
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 11
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . 2
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . --
- ---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 544
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . 2,931
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . (16)
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . 11,638
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . $14,553
===============================================================================================================
</TABLE>
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MAY 31, 1996 November 30, 1995
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 2,931 $ 7,924
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . (16) 1,884
Change in Unrealized Appreciation (Depreciation) . . . . . . 11,638 17,030
- ----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 14,553 26,838
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . (4,418) (7,826)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . (1,993) (2,865)
- ----------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . (6,411) (10,691)
- ----------------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . (149) (324)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . 14,010 22,103
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 5,581 9,297
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . (35,094) (50,607)
- ----------------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions . . . . . (15,503) (19,207)
- ----------------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . (7,510) (3,384)
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . 172,082 175,466
- ----------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . $164,572 $172,082
==========================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . 1,167 1,995
Issued in Lieu of Cash Distributions . . . . . . . . . . 473 866
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . (2,970) (4,586)
- ----------------------------------------------------------------------------------------------------------
(1,330) (1,725)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
SIX MONTHS ENDED -----------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $12.03 $10.94 $12.89 $11.77 $ 9.82 $8.07
------ ------ ------ ------ ------ -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .22 .52 .53 .56 .56 .53
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . .89 1.26 (1.04) 1.03 1.92 1.77
------ ------ ------ ------ ------ -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . 1.11 1.78 (.51) 1.59 2.48 2.30
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.32) (.51) (.53) (.47) (.53) (.55)
Distributions from Realized Capital Gains . . . . . . . (.14) (.18) (.91) -- -- --
------ ------ ------ ------ ------ -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.46) (.69) (1.44) (.47) (.53) (.55)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $12.68 $12.03 $10.94 $12.89 $11.77 $9.82
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . +9.53% +17.10% -4.35% +13.87% +26.01% +29.25%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . $165 $172 $175 $202 $120 $55
Ratio of Total Expenses to Average Net Assets . . . . . . . .67%* .75% .73% .71% .85% .81%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 3.60%* 4.63% 4.68% 4.44% 4.80% 5.72%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . .27%* 46% 52% 81% 55% 57%
Average Commission Rate Paid . . . . . . . . . . . . . . . $.0600+ N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
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 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 a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require 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 March 1, 1998, 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,
1996, the investment advisory fee represented an effective annual rate of .35
of 1% of average net assets after giving effect to a fee waiver from January 1,
1996, to February 29, 1996, of $13,000 (an annual rate of .02 of 1%).
C. The Vanguard Group 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, 1996,
the Fund had contributed capital of $17,000 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.
10
<PAGE> 11
D. During the six months ended May 31, 1996, the Fund made purchases of
$21,627,000 and sales of $40,477,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At May 31, 1996, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $16,973,000, of which $22,245,000
related to appreciated securities and $5,272,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at May 31, 1996,
was $4,690,000, for which the Fund had received cash collateral of $4,792,000.
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 Selected Value Portfolio
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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.
Q822-5/96
VANGUARD
CONVERTIBLE
SECURITIES FUND
SEMI-ANNUAL REPORT
MAY 31, 1996
