<PAGE> 1
VANGUARD
CONVERTIBLE
SECURITIES FUND
[PHOTO]
Semiannual Report
May 31, 1997
[THE VANGUARD GROUP LOGO]
<PAGE> 2
THE VANGUARD GROUP:
LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future.
The montage includes a bronze medallion with a likeness of our namesake, HMS
Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built
circa 1816 in Scotland, featuring a portrait of Nelson; and several views of
our recently completed campus, which is steeped in nautical imagery--from our
buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
6
Financial
Statements
7
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
<PAGE> 3
[PHOTO]
FELLOW SHAREHOLDER,
The stock market continued its remarkable surge even as rising interest
rates eroded returns from bonds during the six months ended May 31, 1997, the
first half of the fiscal year for Vanguard Convertible Securities Fund. The
divergence between stocks and bonds in the period was reflected in the +5.4%
return we achieved, which is what you would expect since convertible securities
are hybrid securities with characteristics of both equities and bonds.
The adjacent table compares Vanguard Convertible Securities Fund's total
return (capital change plus reinvested dividends) for the six months with those
of the unmanaged Credit Suisse First Boston Convertible Securities Index and
the average convertible securities mutual fund. We also present the returns for
the period for two broad market benchmarks: for stocks, the Standard & Poor's
500 Composite Stock Price Index, and for bonds, the Lehman Brothers Aggregate
Bond Index. As you can see, our return matched that of the Convertible
Securities Index but fell short of the return achieved by the average competing
fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
MAY 31, 1997
- ----------------------------------------------------------------------
<S> <C>
Vanguard Convertible Securities Fund + 5.4%
- ----------------------------------------------------------------------
Average Convertible Securities Fund + 7.0%
- ----------------------------------------------------------------------
CS First Boston Convertible
Securities Index + 5.4%
- ----------------------------------------------------------------------
S&P 500 Index + 13.1%
Lehman Aggregate Bond Index + 0.9
- ----------------------------------------------------------------------
</TABLE>
The Fund's return is based on a decrease in net asset value from $13.07 per
share on November 30, 1996, to $12.15 per share on May 31, 1997, with the
latter figure adjusted for dividends totaling $0.25 per share paid from net
investment income and distributions totaling $1.29 paid from net realized
capital gains. As of May 31, the Fund's current dividend yield was 3.5%,
compared with 3.2% as of May 31, 1996.
THE PERIOD IN REVIEW
Exuberance, whether irrational or not, was the dominant mood in the stock
market during the first half of our fiscal year. The climate was nearly ideal
for common stocks as strong economic growth, rising corporate profits, and
relatively low inflation prevailed during the six months. Yet the market's
strong advance was bumpy and top-heavy; large-capitalization growth stocks
significantly outpaced other sectors. Volatility was particularly evident in
the nearly -10% decline in the S&P 500 Index during the seven weeks following
its record high on February 18. To the surprise of many observers, however, the
drop was followed by an energetic rebound during the final seven weeks of the
period. By May 31, market averages were again at record highs. For the six
months, the S&P 500 Index provided a generous return of +13.1%.
Jitters about interest rates apparently caused the brief slide. The
subsequent rebound stemmed from a combination of factors, including strong
earnings reports by many key companies, a lessening of inflation fears, and an
easing in interest rates from peaks reached in mid-April. Whatever their
causes, the price fluctuations served as a clear reminder of the volatility
that is very much a part of investing in stocks.
1
<PAGE> 4
During the half-year, the bond market, as measured by the Lehman Aggregate
Bond Index, provided a total return of +0.9%. Bond prices were buffeted by
swift reactions to each change in sentiment about the strength of the U.S.
economy and the possibility that inflation would accelerate. Yields moved
higher during the first four months of the period, then retreated in April and
May as concerns about inflation eased somewhat. On balance, interest rates
ended the period higher than they started, with the yield on the benchmark
30-year U.S. Treasury bond rising from 6.35% on November 30, 1996, to 6.91% on
May 31.
Convertible Securities Fund's +5.4% return matched the return on the First
Boston Convertible Securities Index. We trailed the average convertible
securities fund by 1.6 percentage points, in part because we hold relatively
light positions in convertible preferred stocks, a type of security that
provided higher returns during the six-month period than convertible bonds.
Also, many convertible securities funds benefited by holding meaningful
positions in common stocks, securities which are not held by the Fund.
Convertible securities, which are generally issued by small and medium-sized
companies, were at a disadvantage during the half-year versus the S&P 500
Index, which is dominated by large-capitalization stocks. The S&P 500 Index
return of +13.1% was twice the +6.5% return on the rest of the stock market, as
measured by the Wilshire 4500 Equity Index.
We note that a six-month period is far too brief a span for making
judgments about the performance of any mutual fund.
IN SUMMARY
The extraordinary returns provided by the financial markets during the past 15
years may have overshadowed risk, the other side of the eternal investing
equation. But the risks of investing are still very much present in today's
markets. In an uncertain environment, the historically lower volatility of
convertible securities--which combine some of the income features of bonds with
some of the capital appreciation potential of common stocks--may be
particularly welcome.
In any event, we continue to believe that a balanced, well-diversified
investment portfolio is the best way to ride out the ups and downs of the
financial markets and "stay the course" toward long-term objectives. We look
forward to reporting to you on the entire fiscal year six months from now.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
June 20, 1997
2
<PAGE> 5
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MAY 31, 1997
U.S. EQUITY MARKETS
With the economy continuing to exhibit strong growth and modest levels of
inflation, investors in U.S. common stocks were rewarded with solid gains
during the past six months. The best performers were primarily
larger-capitalization issues, although the small-company indexes finally
exhibited some strength in May. For example, during the last six months, the
Standard & Poor's 500 Composite Stock Price Index gained 13.1%, fueled by a
6.1% boost in May. Reflecting the gains among smaller companies, the Russell
2000 Index posted an 8.4% increase for the six-month period, driven by an 11.1%
jump in May. It was particularly noteworthy that May's small-cap gains were led
by a 15.0% surge among small growth stocks, the worst segment of the U.S.
market during the past 12 months.
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year. The strength in earnings and the
expectation that income will increase at an attractive pace helped stocks to
continue to produce solid gains in the fiscal period, despite the 0.6% increase
in the yield of the 10-year U.S. Treasury bond over the past six months. What's
more, earnings have shown not only good strength but remarkable consistency in
beating the consensus forecasts of Wall Street analysts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
------------------------------
PERIODS ENDED MAY 31, 1997
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 13.1% 29.4% 18.4%
Russell 2000 Index 8.4 7.0 15.8
MSCI-EAFE Index 4.2 7.9 10.9
- --------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 0.9% 8.3% 7.2%
Lehman 10-Year Municipal
Bond Index 1.7 8.2 7.5
Salomon 90-Day U.S. Treasury Bills 2.6 5.3 4.5
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.9% 2.2% 2.8%
- --------------------------------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the technology sector (up 17.5%) and the consumer-staples sector (up
20.4%). By contrast, the more economically sensitive and less predictable
earnings of stocks in the materials & processing sector caused these issues to
lag the broad market, although, on an absolute basis, their 8.2% return over
six months is quite good.
U.S. FIXED-INCOME MARKETS
The general rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased
from 6.04% at the end of November to 6.97% by the middle of April. Economic
reports released in the last several weeks of the period indicated a possible
slowing in economic growth, which reduced fears that inflation might accelerate
and helped interest rates fall to 6.66% by the end of May.
3
<PAGE> 6
Fueled by robust consumer spending, the U.S. economy expanded at a strong
3.8% annual rate in the fourth quarter of 1996 and a remarkable 5.8% rate in
the first three months of 1997. The nation's unemployment rate, at 4.8% in May,
was the lowest in a generation. Strong economic growth and tight labor markets
often lead bond investors to expect an acceleration in inflation because of
increased demand for goods and services. Reflecting this expectation, the
Federal Reserve raised its federal funds interest rate target by 0.25% on March
25 in a "preemptive" strike against mounting inflationary pressures. Observed
price increases have been subdued in recent months, however. Wholesale prices
have fallen in each of the first four months of 1997, and so far this year
consumer prices have risen at a slower pace than last year.
Higher interest rates dampened returns for bond investors. The Lehman
Brothers Aggregate Bond Index gained 0.94% over the past six months, reflecting
an income return of 3.43% that was partially offset by a capital decline of
- -2.49%. During this period, investors who favored shorter-maturity and
lower-quality issues achieved somewhat better returns. Mortgage-backed
securities continued to perform well because refinancing activity has been
reduced to historically low levels as interest rates have risen. Municipal
issues also tended to perform better than their taxable counterparts.
INTERNATIONAL EQUITY MARKETS
International investors fared reasonably well over the past six months. As
measured by the broad Morgan Stanley Capital International-Europe, Australasia,
Far East Index, foreign markets gained 4.2%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, gaining 11% in May alone. Better tone in
the economy, plus strong earnings reported by export-oriented companies
benefiting from the weak yen, gave Japan a long-awaited boost. For the six
months, however, the Japanese market remained in negative territory (-5.5%).
The competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 12.4% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. Market reaction to the new French
government was mixed. France lost -2.1% in May (in francs), while Germany
gained 2.7% (in deutsche marks). For the six months, Europe gained 20.1% in
local currencies, which a strong dollar trimmed to 11.1% for U.S. investors.
4
<PAGE> 7
[PHOTO]
REPORT FROM THE ADVISER
It is a pleasure to present our first semiannual report to the investors in
Vanguard Convertible Securities Fund. Since taking over management of the Fund
on November 1 of last year, we have made significant changes in its holdings,
and the Fund is now invested in line with other convertible securities
portfolios we manage.
For the six months ended May 31, the first half of the Fund's fiscal year,
we were pleased with performance on both an absolute and relative basis, with
the Fund equaling the return of the CS First Boston Convertible Securities
Index. This Index, representing approximately 325 actively traded convertible
securities, is widely used as a benchmark of convertible performance. We
matched its return even though our relative performance was hurt by our
underweighting of convertible preferreds, as these more-volatile securities
outperformed convertible bonds during the period. Overall, our portfolio
remains quite balanced, and we are satisfied by our performance during the
half-year.
During the six months, the two determinants of the performance of
convertibles--interest rates and the prices of underlying stocks--were quite
volatile. This caused radical week-to- week swings in convertibles' conversion
values (the equity component) and investment values (the bond component).
Nevertheless, convertible performance in general, and the Fund's performance in
particular, handily beat most fixed-income returns. Both the convertible Index
and the Fund lagged the return on the Standard & Poor's 500 Composite Stock
Price Index, however. This was due to the fact that mid-cap and small-cap
equities--the types of companies that issue many convertible
securities--performed significantly worse than the S&P 500 Index during this
period.
Our principal strategic recourse has been a keen focus on profit-taking in
highly appreciated issues and on investing proceeds from those sales in
securities that we feel offer a superior combination of upside potential and
downside protection. We have continued on our normal course of de-emphasizing
convertible preferreds, and the preferreds we bought have generally carried the
promise of redemption on specific dates. The vast majority of our current
portfolio is in coupon-bearing convertible bonds with maturities or puts within
three to seven years.
During the last six months, we established meaningful positions in four
new five-year debentures. These came from USA Waste Services, a fast-growing
waste-management firm; CUC International, a consumer services company; EMC, a
manufacturer of information storage products; and U.S. Filter, a global
provider of industrial and commercial water. All four carry three years of call
protection, moderate conversion premiums, and solid credit ratings. We
anticipate a rise in convertible issuance over the near term and expect to see
reasonably attractive pricing from a wide variety of issuers.
Oaktree Capital Management LLC
June 9, 1997
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved by investing in a broadly diversified group
of convertible securities that provide attractive combinations of current
income and potential for price appreciation from their convertibility into
common stock.
5
<PAGE> 8
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
CONVERTIBLE SECURITIES FUND
TOTAL INVESTMENT RETURNS: JUNE 17, 1986-MAY 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------
CONVERTIBLE SECURITIES FUND FIRST BOSTON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1986 -2.0% 1.8% -0.2% 1.6%
1987 -19.0 4.2 -14.8 -5.4
1988 11.4 7.4 18.8 16.5
1989 10.7 7.0 17.7 16.3
1990 -16.3 5.4 -10.9 -8.7
1991 21.7 7.5 29.2 24.6
1992 19.9 6.1 26.0 21.7
1993 9.5 4.4 13.9 19.2
1994 -8.5 4.1 -4.4 -3.9
1995 11.9 5.2 17.1 24.0
1996 9.9 5.0 14.9 15.3
1997** 3.3 2.1 5.4 5.4
- --------------------------------------------------------
</TABLE>
*CS First Boston Convertible Securities Index.
**Six months ended May 31, 1997.
See Financial Highlights table on page 12 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Convertible Securities Fund 6/17/86 11.78% 10.58% 3.19% 5.50% 8.69%
- ------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
6
<PAGE> 9
FINANCIAL STATEMENTS
MAY 31, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (75.6%)
- ----------------------------------------------------------------------------
AUTO & TRANSPORTATION (4.9%)
Airborne Freight Corp.
6.75%, 8/15/01 $ 475 $ 534
Continental Airlines, Inc.
6.75%, 4/15/06 1,820 2,375
Magna International
5.00%, 10/15/02 2,310 2,582
MascoTech Inc.
4.50%, 12/15/03 3,045 2,824
--------
8,315
--------
CONSUMER DISCRETIONARY (20.4%)
Boston Chicken, Inc.
0.00%, 6/1/15 5,850 1,316
7.75%, 5/1/04 1,745 1,645
(3) CUC International, Inc.
3.00%, 2/15/02 2,555 2,549
(3) Einstein/Noah Bagel Corp.
7.25%, 6/1/04 1,575 1,481
Federated Department Stores
5.00%, 10/1/03 1,245 1,572
Hilton Hotels Corp.
5.00%, 5/15/06 2,520 2,728
Home Depot, Inc.
3.25%, 10/1/01 4,245 4,542
Imax Corp.
5.75%, 4/1/03 2,000 2,325
Jacor Communications, Inc.
0.00%, 6/12/11 4,410 2,293
Marriott International
0.00%, 3/25/11 7,360 4,269
(3) Nine West Group
5.50%, 7/15/03 1,050 950
(3) Omnicom Group, Inc.
4.25%, 1/3/07 1,015 1,162
Speedway Motorsports, Inc.
5.75%, 9/30/03 1,500 1,508
(3) Staples Inc.
4.50%, 10/1/00 2,220 2,575
Time Warner Inc.
0.00%, 6/22/13 3,790 1,724
U.S. Office Products Co.
5.50%, 2/1/01 1,495 1,607
5.50%, 5/15/03 500 425
--------
34,671
--------
ENERGY (7.0%)
Diamond Offshore Drilling, Inc.
3.75%, 2/15/07 2,570 2,789
(3) Lomak Petroleum
6.00%, 2/1/07 760 859
(3) Morgan Stanley Group (Convertible
into Schlumberger Ltd.)
0.00%, 5/1/01 2,380 2,332
(3) Offshore Logistics, Inc.
6.00%, 12/15/03 1,060 1,076
Pogo Producing Co.
5.50%, 6/15/06 1,335 1,507
Seacor Holdings Inc.
5.375%, 11/15/06 1,070 1,097
(3) Zhenhai Refining and Chemical
Co., Ltd.
3.00%, 12/19/03 2,000 2,270
--------
11,930
--------
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES (8.1%)
Berkshire Hathaway
1.00%, 12/3/01 $ 2,025 $ 2,025
Cityscape Financial Corp.
6.00%, 5/1/06 1,085 797
Meditrust
6.875%, 11/15/98 2,000 2,070
(3) Mutual Risk Management
0.00%, 10/30/15 8,615 3,963
National Data Corp.
5.00%, 11/1/03 1,675 1,763
Paliburg International Finance
3.50%, 2/6/01 2,275 2,412
Rouse Co.
5.75%, 7/23/02 640 656
--------
13,686
--------
HEALTH CARE (9.7%)
Alza Corp.
0.00%, 7/14/14 7,580 3,335
(3) Heartport Inc.
7.25%, 5/1/04 1,200 1,260
Integrated Health Services, Inc.
5.75%, 1/1/01 2,200 2,511
Morgan Stanley Group
(Convertible into Johnson &
Johnson)
2.00%, 3/29/02 565 620
PhyCor, Inc.
4.50%, 2/15/03 1,750 1,693
Renal Treatment Centers, Inc.
5.625%, 7/15/06 1,825 1,875
(3) Roche Holdings, Inc.
0.00%, 5/6/12 4,180 1,703
Tenet Healthcare Corp.
6.00%, 12/1/05 2,940 3,557
--------
16,554
--------
MATERIALS & PROCESSING (0.5%)
Empresas ICA
5.00%, 3/15/04 1,110 833
--------
PRODUCER DURABLES (12.6%)
(3) Gilat Satellite Networks Ltd.
6.50%, 6/3/04 1,855 1,818
Thermo Electron Euro
4.25%, 1/1/03 3,535 3,836
(3) Thermo Instruments Inc.
4.50%, 10/15/03 2,200 2,244
(3) ThermoQuest Corp.
5.00%, 8/15/00 1,550 1,581
U.S. Filter Corp.
4.50%, 12/15/01 5,000 5,150
USA Waste Services Inc.
4.00%, 2/2/02 4,660 4,846
WMX Technologies Inc.
2.00%, 1/24/05 2,210 2,022
--------
21,497
--------
TECHNOLOGY (9.2%)
(3) Adaptec Inc.
4.75%, 2/1/04 1,215 1,221
Comverse Technology Inc.
5.75%, 10/1/06 610 714
(3) Data General Corp.
6.00%, 5/15/04 1,625 1,739
(3) EMC Corp.
3.25%, 3/15/02 2,795 3,054
HMT Technology Corp.
5.75%, 1/15/04 2,235 1,922
SCI Systems, Inc.
5.00%, 5/1/06 1,355 2,002
(3) Safeguard Scientifics, Inc.
6.00%, 2/1/06 890 899
Unisys Corp.
8.25%, 8/1/00 2,710 2,683
(3) Xilinx, Inc.
5.25%, 11/1/02 1,175 1,422
--------
15,656
--------
UTILITIES (3.2%)
Midcom Communications Inc.
8.25%, 8/15/03 2,000 1,640
US WEST, Inc.
0.00%, 6/25/11 6,200 2,310
(3) Winstar Communications, Inc.
0.00%, 10/15/05 2,480 1,438
--------
5,388
--------
- ----------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(COST $124,420) 128,530
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ----------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (23.3%)
- ----------------------------------------------------------------------------
CONSUMER DISCRETIONARY (4.6%)
Hollinger International, Inc. 9.75%
Cvt. Pfd. 176,200 1,938
Kmart Financing 7.75% Cvt. Pfd. 75,400 4,439
Royal Caribbean 7.25% Cvt. Pfd. 22,400 1,378
--------
7,755
--------
ENERGY (0.8%)
(3) Tosco Financial Trust 5.75%
Cvt. Pfd. 22,700 1,328
--------
FINANCIAL SERVICES (2.9%)
Insignia Financial 6.50% Cvt. Pfd. 32,100 1,453
(1) National Australia Bank Ltd.
7.875% Cvt. Pfd. 78,600 2,112
(3) PennCorp Financial $3.50 Cvt. Pfd. 24,700 1,426
--------
4,991
--------
HEALTH CARE (1.3%)
(1)(2) Laboratory Corp. of America
Holdings $4.25 Cvt. Pfd. 15,000 866
(3) McKesson Corp. $2.50 Cvt. Pfd. 24,000 1,428
--------
2,294
--------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------
<S> <C> <C>
MATERIALS & PROCESSING (2.8%)
Freeport-McMoRan, Inc. 7.00%
Cvt. Pfd. 58,800 $ 1,602
Merrill Lynch & Co., Inc. 6.25%
Cvt. Pfd. (Convertible into
IMC Global Inc.) 29,500 1,180
Timet Capital Trust 6.625%
Cvt. Pfd. 39,000 1,950
--------
4,732
--------
TECHNOLOGY (4.9%)
(3) Loral Space & Communications
Ltd. 6.00% Cvt. Pfd. 46,200 2,414
Microsoft Corp. $2.196 Cvt. Pfd. 22,500 1,932
(1) Morgan Stanley Group/
Advanced Micro Devices
$3.8625 Cvt. Pfd. PERQS
(Convertible into Advanced
Micro Devices) 45,900 1,790
(3) QUALCOMM, Inc. 5.75% Cvt. Pfd. 48,500 2,219
--------
8,355
--------
UTILITIES (6.0%)
(3) CalEnergy Capital Trust II 6.25%
Cvt. Pfd. 34,600 2,007
Globalstar Telecommunications
Ltd. 6.50% Cvt. Pfd. 37,100 2,003
(1)(3) IXC Communications, Inc. 7.25%
Cvt. Pfd. 20,500 2,347
Salomon Inc. 6.25% Cvt. Pfd.
(Convertible into Cincinnati
Bell, Inc.) 29,800 1,795
SBC Communications Inc. 7.75%
Cvt. Pfd. 46,000 1,995
--------
10,147
--------
- ----------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $37,407) 39,602
- ----------------------------------------------------------------------------
OTHER SECURITIES
- ----------------------------------------------------------------------------
- - Laboratory Corp. of America
Holdings Rights Exp. 6/16/97 3,800 30
- ----------------------------------------------------------------------------
TOTAL OTHER SECURITIES
(COST $28) 30
- ----------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (0.6%)
- ----------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.56%, 6/2/97
(COST $985) $985 985
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $162,840) 169,147
- ----------------------------------------------------------------------------
<CAPTION>
MARKET
VALUE*
(000)
- ----------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.5%)
- ----------------------------------------------------------------------------
Other Assets--Notes C and F 9,254
Liabilities--Note F (8,446)
-------
808
- ----------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------
Applicable to 13,986,358 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $169,955
============================================================================
NET ASSET VALUE PER SHARE $12.15
============================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income Producing Security.
(1) New issue that has not paid a dividend as of May 31, 1997.
(2) Security purchased on a when-issued or delayed delivery basis for which
the Fund has not taken delivery as of May 31, 1997.
(3) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 1997,
the aggregate value of these securities was $50,765,000, representing
29.9% of net assets.
PERQS-- Performance Equity-Linked Redemption
Quarterly Pay Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AT MAY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $158,608 $11.34
Undistributed Net
Investment Income 1,120 .08
Accumulated Net Realized Gains 3,920 .28
Unrealized Appreciation--Note E 6,307 .45
- ----------------------------------------------------------------------------
NET ASSETS $169,955 $12.15
============================================================================
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
SIX MONTHS ENDED MAY 31, 1997
(000)
- -------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 998
Interest 3,064
-------
Total Income 4,062
-------
EXPENSES
Investment Advisory Fees--Note B 347
The Vanguard Group--Note C
Management and Administrative 230
Marketing and Distribution 18
Taxes (other than income taxes) 6
Custodian Fees 10
Auditing Fees 3
Shareholders' Reports 11
Annual Meeting and Proxy Costs 1
-------
Total Expenses 626
Expenses Paid Indirectly--Note G (10)
-------
Net Expenses 616
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,446
- -------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 3,903
- -------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,450
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 8,799
===========================================================================================
</TABLE>
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAY 31, 1997 NOV. 30, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,446 $ 5,593
Realized Net Gain 3,903 17,085
Change in Unrealized Appreciation (Depreciation) 1,450 (478)
------------------------------------
Net Increase in Net Assets Resulting from Operations 8,799 22,200
------------------------------------
DISTRIBUTIONS
Net Investment Income (3,359) (7,267)
Realized Capital Gain (16,736) (1,993)
------------------------------------
Total Distributions (20,095) (9,260)
------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 21,784 32,298
Issued in Lieu of Cash Distributions 18,074 8,032
Redeemed (28,331) (55,628)
------------------------------------
Net Increase (Decrease) from Capital Share Transactions 11,527 (15,298)
- -------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 231 (2,358)
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 169,724 172,082
------------------------------------
End of Period $169,955 $169,724
=============================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,840 2,601
Issued in Lieu of Cash Distributions 1,554 666
Redeemed (2,396) (4,586)
------------------------------------
Net Increase (Decrease) in Shares Outstanding 998 (1,319)
=============================================================================================================
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------
THROUGHOUT EACH PERIOD MAY 31, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.07 $12.03 $10.94 $12.89 $11.77 $ 9.82
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .43 .52 .53 .56 .56
Net Realized and Unrealized Gain (Loss)
on Investments .37 1.29 1.26 (1.04) 1.03 1.92
--------------------------------------------------------------
Total from Investment Operations .62 1.72 1.78 (.51) 1.59 2.48
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.25) (.54) (.51) (.53) (.47) (.53)
Distributions from Realized Capital Gains (1.29) (.14) (.18) (.91) -- --
--------------------------------------------------------------
Total Distributions (1.54) (.68) (.69) (1.44) (.47) (.53)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.15 $13.07 $12.03 $10.94 $12.89 $11.77
=======================================================================================================================
TOTAL RETURN 5.39% 14.88% 17.10% -4.35% 13.87% 26.01%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $170 $170 $172 $175 $202 $120
Ratio of Total Expenses to
Average Net Assets 0.74%* 0.69% 0.75% 0.73% 0.71% 0.85%
Ratio of Net Investment Income to
Average Net Assets 4.12%* 3.43% 4.63% 4.68% 4.44% 4.80%
Portfolio Turnover Rate 180%* 97% 46% 52% 81% 55%
Average Commission Rate Paid $.0596 $.0594 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
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, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued at the latest quoted bid
prices. 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. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Discounts on debt
securities purchased are accreted to interest income over the lives of the
securities.
B. Oaktree Capital Management LLC provides investment advisory services to the
Fund for a fee calculated at an annual percentage rate of average net assets.
For the six months ended May 31, 1997, the advisory fee represented an
effective annual rate of 0.42% of the Fund's average net assets.
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, 1997,
the Fund had contributed capital of $13,000 to Vanguard (included in Other
Assets), representing 0.1% of Vanguard's capitalization. The Fund's directors
and officers are also directors and officers of Vanguard.
D. During the six months ended May 31, 1997, the Fund purchased $146,355,000
of investment securities and sold $146,695,000 of investment securities, other
than temporary cash investments.
E. At May 31, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $6,307,000, consisting
of unrealized gains of $9,060,000 on securities that had risen in value since
their purchase and $2,753,000 in unrealized losses on securities that had
fallen in value since their purchase.
F. The market value of securities on loan to brokers/dealers at May 31, 1997,
was $6,638,000, for which the Fund held cash collateral of $6,783,000.
G. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended May 31, 1997, custodian fee offset arrangements reduced
expenses by $10,000 (an annual rate of 0.01% of average net assets).
13
<PAGE> 16
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional Investor Group.
Ralph K. Packard, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at: Post Office Box 2600, Valley Forge,
Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 17
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q822-5/97
