<PAGE> 1
VANGUARD
CONVERTIBLE
SECURITIES FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Convertible Securities Fund and the other Funds
in The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
[FIGURE 1]
JOHN J. BRENNAN JOHN C. BOGLE
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
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:
The 1995 fiscal year for Vanguard Convertible Securities Fund, which ended on
November 30, presented a sharp contrast to fiscal 1994. During our prior fiscal
year, bond prices fell sharply while stock prices slipped into negative
territory; during fiscal 1995, both stocks and bonds enjoyed stupendous bull
markets. All told, then, the past twelve months was a pretty good period for
convertible securities, but not nearly as good as it was for common stocks.
In this environment, Vanguard Convertible Securities Fund enjoyed a
solid absolute total return (capital change plus reinvested income), albeit one
that failed to measure up to competitive standards. This table presents the
Fund's total return for the fiscal year compared to the return of our principal
competitive norm--the unmanaged Goldman Sachs Convertible 100 Index--as well as
the returns of the two unmanaged market indexes that we have traditionally used
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, 1995
<S> <C>
VANGUARD CONVERTIBLE SECURITIES FUND +17.1%
GOLDMAN SACHS CONVERTIBLE 100 INDEX +25.9%
STANDARD & POOR'S 500 STOCK INDEX +36.9%
LEHMAN AGGREGATE BOND INDEX +17.6
</TABLE>
The Fund's total return is based on net asset values of $10.94 per share on
November 30, 1994, and $12.03 on November 30, 1995, with the latter figure
adjusted to take into account the reinvestment of four quarterly dividends
totaling $.51 per share from net investment income, plus a distribution of $.18
per share from net capital gains realized during fiscal 1994. At fiscal year
end, the Fund's income yield was 4.4%.
THE FISCAL YEAR IN REVIEW
The great bull market in stocks and bonds that we enjoyed during the past
twelve months was continuous and virtually uninterrupted. The dimension of the
increase was close to record-breaking in both markets, delighting the bulls
even as it astonished the bears. After all was said and done in the stock
market during our fiscal year, the unmanaged Standard & Poor's 500 Composite
Stock Price Index had generated a total return of +36.9%.
There were, as always, many opinions as to the source of the
surprising strength of the stock market. In my view, it resulted from a
combination of: (1) record-breaking corporate profits; (2) a growing
speculative fever in the marketplace, especially during the final weeks of our
fiscal year; and (3) a sharp decline in long-term interest rates. The rise in
corporate profits was particularly striking. Operating earnings for the
companies in the Standard & Poor's 500 Index are presently estimated to
increase about +15% in 1995, after already rising +16% in 1994. (Since 1926,
earnings growth has averaged less than +7% per year.) If there is a cautionary
signal in this boom in profits, it is that the two-year cumulative earnings
growth of +33% has been accompanied by dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock
prices resulted in a decline in the yield on the Index to 2.3%, the lowest
level on record. Nonetheless, the Wall Street chorus sings "this time it's
different." Dividend yield and earnings growth--the two fundamentals of stock
returns--are clearly taking a back seat to the market's high valuation of the
long-term fundamentals. This is called "speculation," and it is hardly an
inconsequential component of 1995's high returns on stocks. So, as we enter our
1996 fiscal year, such a low yield is surely a sobering statistic.
A huge decline in long-term interest rates not only stimulated the
stock market, but set bond prices afire. The yield of the long-term U.S.
Treasury bond declined from 8.0% to 6.1% during our 1995 fiscal year, even
below its level of 6.3% at the start of fiscal 1994. The 1995 decline drove
long-term bond prices
1
<PAGE> 4
[FIGURE 2]
up by fully +26.0% for the twelve months, providing (along with the interest
coupon) a total return of +32.6%--not far short of the return on stocks.
The abrupt decline in long-term interest rates over the past twelve
months was related to several contributing factors. Most importantly, we
should not lose sight of the fact that interest rates had risen virtually
without interruption in the months leading up to the commencement of our 1995
fiscal year, reaching a peak in November 1994. This climb in rates was
engendered largely by investors' fears about a resurgence of inflation. With
the Federal Reserve Board raising the Federal funds rate (the rate at which
banks borrow from one another) an unprecedented seven times in the 13 months
from February 1994 to February 1995, these inflation fears certainly seemed
well-founded.
Although restrictive monetary policy often fails to deliver the
desired result, in this case the Fed's medicine seemed to work as intended.
That is, U.S. economic growth slowed and inflation concerns gradually
dissipated. Reflecting this renewed investor optimism, long-term rates did an
about-face in late January 1995 and began to move steadily lower. By the summer
of 1995, the Fed relaxed its stern monetary policy, and actually reduced the
Federal funds rate by 25 basis points(1/4 of 1%), to 5 3/4%.*
As I noted in my letter to you one year ago, during the first five
years of the 1990s, stocks provided an average annual return of +8.9%; bonds
+7.6%. At that time, both figures seemed fairly consistent with long-term
fundamentals. However, the remarkable returns of 1995 have substantially raised
the decade's cumulative performance. With six years of the 1990s now history,
the average annual returns for stocks and bonds have grown to +13.1% and +9.2%,
respectively. As much as investors have enjoyed the benefits of this boom in
the financial markets, there should be no mistake about it: returns of such
magnitude are unlikely to recur during the remainder of the decade.
THE FUND IN FISCAL 1995
Although the Fund achieved a strong double-digit return of +17.1% during the
fiscal year, this performance pales somewhat when compared to the results of
competitive standards. The Goldman Sachs Convertible 100 Index provided a
return of +25.9% during the past twelve months--nearly nine percentage points
above our Fund's return. We did a bit better relative to the return of the
average convertible securities fund (+19.2%), but nonetheless fell two
percentage points behind our average peer's return.
As you know, the Goldman Sachs Convertible 100 Index is only a
theoretical construct, incurring none of the expenses of fund operations,
including advisory fees, fund transaction costs, and the "drag" of cash
reserves. As such, it represents a perennially tough standard for "real world"
mutual funds. This Index is also an imperfect measure of the convertible
securities market, as it includes only the 100 largest
- ---------------
*After the conclusion of the period covered by this Annual Report, the Fed
reduced the short-term interest rate by 1/4 of 1%, bringing this key rate to 5
1/2%.
2
<PAGE> 5
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1995
- -------------------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE SECURITIES FUND +17.10% +15.74% +8.69%
AVERAGE CONVERTIBLE FUND +19.21 +14.96 +8.49
GOLDMAN SACHS CONVERTIBLE INDEX +25.88 +16.86 +9.26
</TABLE>
* Inception, June 17, 1986.
Note: Past performance is not predictive of future performance.
convertible issues with a market capitalization of $32 billion. The market
value of the entire convertible securities market amounts to some $100 billion.
Given this disparity, it seems almost certain that our Fund--indeed,
all convertible securities funds--will deviate widely from this Index in any
given year. In some years the disparity will be on the plus side (as in 1989,
when the Fund outperformed this standard by more than eight percentage points),
and in others it will be distinctly negative (as in our past fiscal year).
Our shortfall relative to our average competitor is easier to explain.
First, as we have often noted in past Reports, our Fund simply is structured
differently than the portfolios of most of our competitors. We hold a much
higher weighting than our competitors in convertible securities (88% of assets
for our Fund versus 77% for the average competitor) and a lower weighting in
straight bonds and common stocks (10% for the Fund versus 14% for the
competitors). During a period in which both stocks and bonds turned in
spectacular gains, our competitors' modest overweighting in these two asset
classes proved beneficial.
Second, although the stock market advanced in near-record fashion in
fiscal 1995, its gains were not distributed evenly across all types of stocks.
Specifically, blue-chip stocks with large market capitalizations far outpaced
their smaller-capitalization cousins. Given that the large stocks rarely
include convertibles in their corporate structures, and that the small-cap
arena is an important area of emphasis for our adviser, Desai Capital
Management Inc., it is not entirely unexpected that our Fund should lag in this
kind of an environment.
A LONGER-TERM PERSPECTIVE
The lifetime record of Vanguard Convertible Securities Fund is illustrated in
the customary chart above--both in percentage terms and dollar terms (based on
an initial investment of $10,000)--
3
<PAGE> 6
<TABLE>
<CAPTION>
TOTAL RETURN*
JUNE 17, 1986, TO
NOVEMBER 30, 1995
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
<S> <C> <C>
VANGUARD CONVERTIBLE
SECURITIES FUND +8.7% $21,990
AVERAGE CONVERTIBLE
SECURITIES FUND +8.5% $21,620
GOLDMAN SACHS CONVERTIBLE
100 INDEX +9.3 23,100
</TABLE>
* Assumes the reinvestment of all dividends and capital gains distributions.
compared with our two benchmark standards. The results are summarized in the
table above.
The chart reflects both ups and downs in the financial markets, and
there is no telling whether the ever-unpredictable markets of the future will
provide either better returns or worse returns than those shown. However, I
should note that, during this period, the total return on the stock market was
well above its long-term norm of +10.6% going all the way back to 1926.
Given the proximity of the annual rates of return illustrated in the
table and the chart, it is probably fair to call the results of the period "a
draw" among Vanguard Convertible Securities Fund, its peers, and its most
comparable index standard. Indeed, our 0.57% annual shortfall relative to the
Goldman Index is roughly equivalent to our annual expense ratio (expenses as a
percentage of average net assets) of 0.75%. Our slight margin over the average
convertible securities fund, on the other hand, is more than accounted for by
our expense ratio advantage of +0.66% (0.75% for our Fund versus 1.41% for the
competitors). This differential indicates that, during the past decade, our
investment adviser in fact failed to match the return achieved by his peers.
As noted one year ago, we fully expect our investment adviser to
surpass the results of the average convertible securities fund on a gross basis
(i.e., before deducting expenses), thereby enhancing our natural expense
advantage. Thus, during 1996 the Fund's directors will be carefully evaluating
our objectives, our strategies, our results, and the record of our adviser.
IN SUMMARY
In my closing remarks in last year's Annual Report, I noted that "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."
But I also cautioned that "the equity orientation of convertibles is apt to
engender continuing volatility." As it turns out, I was not nearly optimistic
enough on the bond side, as a strong rebound in the bond market commenced
virtually in lock-step with the start of the new fiscal year. And, while it was
a volatile year for stocks, that volatility showed up on the positive side of
the ledger.
Now that the gains of fiscal 1995 are behind us, what course of action
should shareholders in Vanguard Convertible Securities Fund follow? Well, my
customary advice has always been to "stay the course." You should recognize
that, despite today's short-term risks, the biggest long-term risks are: (1)
failing to invest in the financial markets at all; and (2) following an erratic
and ever-changing course. "Stay the course" has proved wise counsel in the
past, and I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- ------------------
John C. Bogle
Chairman of the Board
December 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD CONVERTIBLE SECURITIES Fund since inception through November 30, 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*
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +119.9% +130.9%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +8.7% +9.3%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
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, 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 +12.74% +16.03% +8.74% +5.66% +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.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
We are pleased to report on the investment activity of the Vanguard Convertible
Securities Fund for the fiscal year ended November 30, 1995. In general,
financial markets produced strong returns throughout the period. The Dow Jones
Industrial Average reached beyond the 5000 mark for the first time late in the
year after crossing the 4000 threshold earlier in 1995.
The Fund's total return of +17.1% for the fiscal year is a bit behind
our convertible securities benchmarks both before and after fund expenses.
Technology issues, which were very strong earlier in the year, retreated
somewhat as the year came to an end, while retail stocks continued their
yearlong underperformance as fears of a weak holiday shopping season
intensified. A heavy exposure to both of these sectors was responsible for a
sizeable portion of the Fund's return over the period.
PORTFOLIO ACTIVITY
Nine new investments were added to the Fund in the second half of the fiscal
year: American Travellers, Houghton Mifflin (Inso), International Paper,
Lowe's, Price/Costco, Security Capital Industrial, Softkey, Starbucks, and U.S.
Filter. Eight investments were completely eliminated, either due to the
deterioration of company fundamentals or price goals being met. The Fund now
holds investments in 48 companies.
PORTFOLIO CHARACTERISTICS
The portfolio emphasizes high-quality companies with superior growth prospects.
The Fund's investments are expected to have average earnings growth of +22% in
1996 as compared to +18% in 1995. In contrast, the companies in the S&P 500
will likely have a +5% growth rate in 1996 following a sharp increase of +15%
this year. Despite this rapid growth in projected earnings, the Fund's
investments are valued at only 15 times 1996 earnings, equal to the
price/earnings ratio of the S&P 500.
In the past, the portfolio has outperformed the market when it has had
a valuation in line with the stock market and S&P 500 earnings were
decelerating. We believe that we are currently in such a period. The current
4.4% yield of our holdings is highly competitive with the low yields offered by
both equities and fixed-income securities today.
The portfolio is broadly diversified across industry groups, with the
major shifts during the period being the addition of securities in the forest
and computer products sectors and a significant reduction in energy and
manufacturing & distribution holdings. Taken together, these shifts increase
the extent to which the portfolio favors rapidly growing, successful companies
in areas which are out of step with the leadership of the strong equity market.
This should add to our ability to outperform the market in the coming months.
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--especially in
technology-related companies--and a decline in interest rates that is expected
to continue. At current valuations, the market is increasingly vulnerable to
both earnings disappointments and any backup in interest rates; however,
neither of these pitfalls appear to be on the near-term horizon. The
convertible new issue calendar has picked up during the period and the interest
rate environment should allow for continued issuance.
With the stock market trading at all-time highs and interest rates
approaching the long-term lows established two years ago, the bulls seem in
control. Your portfolio is positioned to participate in the continuing bull
market with a limited amount of risk.
Respectfully,
Rohit M. Desai
Desai Capital Management, Incorporated
December 18, 1995
6
<PAGE> 9
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard Convertible
Securities Fund has reached an agreement with Desai Capital Management, Inc.
(DCMI), the Fund's investment adviser, on a revised investment advisory
agreement. The revised agreement involves a reduction in the annual rate of
advisory fees to be paid to DCMI. At the Fund's current asset level of
$172,082,000, the dollar amount of the annual fee would decline from $677,000
to $591,000, a reduction of $86,000. The new effective annual fee rate would
equal 0.35% of average net assets over the past twelve months, and would
decline further if the assets of the Fund were to continue to grow.
Under the terms of the new agreement, the Fund will pay DCMI a basic
advisory fee at the end of each fiscal quarter based on the Fund's average
month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL BASIC FEE RATE
<S> <C>
FIRST $50 MILLION 0.40%
NEXT $50 MILLION 0.35%
NEXT $100 MILLION 0.30%
OVER $200 MILLION 0.25%
</TABLE>
This revised investment advisory agreement replaces the Fund's original
agreement with the adviser dated March 1, 1988, and will go into effect on
March 1, 1996. Until the effective date, the adviser has agreed to waive its
advisory fees to the extent necessary to abide by the new fee schedule. For the
fiscal year ended November 30, 1995, the Fund paid approximately $674,000 to
DCMI for investment advisory services.
The adviser, located at 540 Madison Avenue, New York, New York, is a
professional investment counseling firm which specializes in the management of
convertible and equity-linked securities portfolios for institutional clients.
The firm was founded in June 1984. Under the terms of its investment advisory
agreement with the Fund, the adviser agrees to manage the investment and
reinvestment of the assets of the Fund and to continuously review, supervise,
and administer the Fund's investment program. The adviser discharges its
responsibilities subject to the control of the officers and directors of the
Fund.
January 19, 1996
7
<PAGE> 10
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
November 30, 1995
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (65.7%)
- ----------------------------------------------------------------------
BASIC MATERIALS (5.4%)
Albany International
5.25%, 3/15/02 $3,560 $ 3,306
Inco Ltd.
5.75%, 7/1/04 4,400 5,962
-------------
GROUP TOTAL 9,268
-------------
- ----------------------------------------------------------------------
CAPITAL GOODS AND CONSTRUCTION (8.3%)
Cemex
4.25%, 11/1/97 2,000 1,670
Interface, Inc.
8.00%, 9/15/13 3,000 3,071
U. S. Filter Corp.
5.00%, 10/15/00 1,500 1,748
Varlen Corp.
6.50%, 6/1/03 3,500 3,824
WMX Technologies
2.00%, 1/24/05 4,600 4,014
-------------
GROUP TOTAL 14,327
-------------
- ----------------------------------------------------------------------
CONSUMER CYCLICAL (18.5%)
Comcast Corp.
3.375%, 9/9/05 7,700 7,469
Guilford Mills Inc.
6.00%, 9/15/12 4,000 3,900
Lowe's Co.
3.00%, 7/22/03 2,000 2,470
Michaels Stores
4.75%, 1/15/03 2,700 2,133
Office Depot Inc.
0.00%, 12/11/07 3,400 2,558
0.00%, 11/1/08 6,500 4,030
Price/Costco
5.50%, 2/28/12 1,100 1,064
Reliance Industries
3.50%, 11/3/99 1,420 1,424
Rogers Communications Inc.
2.00%, 11/26/05 10,050 5,264
ShoLodge, Inc.
7.50%, 11/1/04 1,300 1,040
Sports & Recreation
4.25%, 11/1/00 905 606
-------------
GROUP TOTAL 31,958
-------------
- ----------------------------------------------------------------------
CONSUMER STAPLES (.7%)
Starbucks Corp.
4.25%, 11/1/02 1,200 1,272
-------------
- ----------------------------------------------------------------------
ENERGY (2.7%)
Pennzoil Co.
(Convertible into Chevron)
6.50%, 1/15/03 3,750 4,603
-------------
- ----------------------------------------------------------------------
FINANCIAL (8.8%)
American Travellers Corp.
6.50%, 10/1/05 1,000 1,270
Banamex
(Convertible into Banacci)
7.00%, 12/15/99 1,270 978
Developers Diversified Realty Corp.
7.00%, 8/15/99 5,500 5,390
First Financial
(Convertible into First Data)
5.00%, 12/15/99 2,700 4,482
Liberty Property Trust
8.00%, 7/1/01 3,000 2,970
-------------
GROUP TOTAL 15,090
-------------
- ----------------------------------------------------------------------
HEALTH CARE (3.0%)
Integrated Health Services
5.75%, 1/1/01 4,150 3,963
6.00%, 1/1/03 1,250 1,181
-------------
GROUP TOTAL 5,144
-------------
- ----------------------------------------------------------------------
TECHNOLOGY (18.3%)
Aspect Telecommunications
5.00%, 10/15/03 4,100 7,277
General Instrument
5.00%, 6/15/00 2,500 2,912
Motorola, Inc.
0.00%, 9/7/09 2,850 3,220
0.00%, 9/27/13 4,630 3,704
Silicon Graphics
0.00%, 11/2/13 6,000 3,713
Softkey International
5.50%, 11/1/00 400 347
SynOptics Communications, Inc.
(Convertible into Bay Networks)
5.25%, 5/15/03 5,250 6,037
Texas Instruments
2.75%, 9/29/02 3,060 4,237
-------------
GROUP TOTAL 31,447
-------------
- ----------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $107,469) 113,109
- ----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (21.8%)
- ----------------------------------------------------------------------
Shares
--------
BASIC MATERIALS (3.4%)
International Paper $2.625 95,000 4,275
Reynolds Metals Co. $3.31 30,000 1,568
-------------
GROUP TOTAL 5,843
-------------
- ----------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
CONSUMER CYCLICAL (3.9%)
Houghton Mifflin 6.00%
(Convertible into Inso) 15,000 $ 1,125
TJX Co. Inc. $3.125 97,000 4,317
Tanger Factory Outlet $1.575 62,500 1,289
-------------
GROUP TOTAL 6,731
-------------
- ----------------------------------------------------------------------
ENERGY (1.6%)
Valero Energy $3.125 50,000 2,675
-------------
- ----------------------------------------------------------------------
FINANCIAL (7.1%)
Northern Trust $3.125 100,000 6,100
Oasis Residential $2.25 60,000 1,493
Security Capital Pacific
Series A $1.75 190,000 4,608
-------------
GROUP TOTAL 12,201
-------------
- ----------------------------------------------------------------------
TECHNOLOGY (3.5%)
General Motors Class E $3.25 85,000 6,078
-------------
- ----------------------------------------------------------------------
TRANSPORT SERVICES (2.3%)
Arkansas Best 5.75% 120,000 4,020
-------------
- ----------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $39,086) 37,548
- ----------------------------------------------------------------------
COMMON STOCKS (10.0%)
- ----------------------------------------------------------------------
* Bay Networks 50,000 2,244
Home Depot, Inc. 167,741 7,444
Security Capital Industrial Trust 90,000 1,496
Taubman Co. REIT 145,000 1,359
Urban Shopping Centers REIT 100,000 2,050
* Vencor, Inc. 82,692 2,563
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $15,923) 17,156
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- ----------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.90%, 12/1/95
(Cost $1,873) $1,873 1,873
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (98.6%)
(Cost $164,351) 169,686
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- ----------------------------------------------------------------------
Other Assets--Notes C and E 5,772
Liabilities--Note E (3,376)
-------------
2,396
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- ----------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 14,306,680 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $172,082
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.03
======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
Amount Per
(000) Share
--------- -------
<S> <C> <C>
Paid in Capital $161,563 $11.30
Undistributed Net
Investment Income 3,210 .22
Accumulated Net
Realized Gains 1,974 .14
Unrealized Appreciation
of Investments--Note D 5,335 .37
- ---------------------------------------------------------------------
NET ASSETS $172,082 $12.03
- ---------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1995
(000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,098
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,116
- ----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 9,214
- ----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . 674
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . $506
Marketing and Distribution . . . . . . . . . . . . . . . . 35 541
----
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . 30
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . 8
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 24
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 5
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . 1
- ----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 1,290
- ----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 7,924
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . 1,884
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . 17,030
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . $26,838
====================================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
NOVEMBER 30, 1995 November 30, 1994
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
DECREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ 7,924 $ 9,064
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 1,884 3,025
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 17,030 (21,028)
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . 26,838 (8,939)
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . (7,826) (8,796)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (2,865) (14,366)
- -----------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (10,691) (23,162)
- -----------------------------------------------------------------------------------------------------
NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . . . . (324) (80)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . 11,735 21,779
--In Lieu of Cash Distributions . . . . . . . . . . . . 9,297 20,966
--Exchange . . . . . . . . . . . . . . . . . . . . . . . 10,368 32,328
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . (15,625) (18,262)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . (34,982) (51,636)
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . (19,207) 5,175
- -----------------------------------------------------------------------------------------------------
Total Decrease . . . . . . . . . . . . . . . . . . . . . . (3,384) (27,006)
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . 175,466 202,472
- -----------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . $172,082 $175,466
=====================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.51 $.53
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $.18 $.91
- -----------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 1,995 4,683
Issued in Lieu of Cash Distributions . . . . . . . . . . . 866 1,812
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (4,586) (6,175)
- -----------------------------------------------------------------------------------------------------
(1,725) 320
- ----------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income. . . . . . . . . . . . . $ 3,210 $ 3,436
- ----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $10.94 $12.89 $11.77 $ 9.82 $8.07
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .52 .53 .56 .56 .53
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . 1.26 (1.04) 1.03 1.92 1.77
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . 1.78 (.51) 1.59 2.48 2.30
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.51) (.53) (.47) (.53) (.55)
Distributions from Realized Capital Gains . . . . . . (.18) (.91) -- -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.69) (1.44) (.47) (.53) (.55)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $12.03 $10.94 $12.89 $11.77 $9.82
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +17.10% -4.35% +13.87% +26.01% +29.25%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . $172 $175 $202 $120 $55
Ratio of Expenses to Average Net Assets . . . . . . . . . .75% .73% .71% .85% .81%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 4.63% 4.68% 4.44% 4.80% 5.72%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 46% 52% 81% 55% 57%
- -------------------------------------------------------------------------------------------------------------------
</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 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, 1996, 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,
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 November 30, 1995, the Fund had contributed capital of $21,000 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.
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (continued)
D. During the year ended November 30, 1995, the Fund made purchases of
$74,219,000 and sales of $86,164,000 of investment securities other than U.S.
Government securities and temporary cash investments.
At November 30, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $5,335,000, of which $15,220,000 related
to appreciated securities and $9,885,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at November 30,
1995, was $595,000, for which the Fund had received cash collateral of
$620,000.
14
<PAGE> 17
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, 1995, and 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, 1995 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 29, 1995
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD CONVERTIBLE SECURITIES FUND, INC.
Corporate shareholders should note that for the fiscal year ended November 30,
1995, 33.7% 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 of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
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 Co. 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. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
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
16
<PAGE> 19
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q820-11/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleons Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 20
VANGUARD CONVERTIBLE SECURITIES FUND
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 cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through four.
A line chart of the Indexed Value between Standard & Poor's 500 Index and
Lehman Aggregate Bond Index for the fiscal years 1990 through 1995.
Line charts illustrating cumulative performance between Vanguard Convertible
Securities Fund, Goldman Sachs Convertible Index and Average Convertible
Securities Fund, average Annual Total Returns for the period June 17, 1986, to
November 30, 1995 appear at the top of page three.
A running head featuring a cannon and battleships in the background appears at
the top of page five.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages six & seven.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eight through fifteen.
A running head featuring a sextant, a map, and battleships in the background
appear at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
