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VANGUARD
CONVERTIBLE
SECURITIES FUND
Semiannual Report - May 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports to celebrate the spirit, enthusiasm, and achievements of our crew.
(We call those who work at Vanguard crew members, not employees, because they
operate as a team to accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS .................... 1
THE MARKETS IN PERSPECTIVE ....................... 3
REPORT FROM THE ADVISER .......................... 5
PORTFOLIO PROFILE ................................ 6
PERFORMANCE SUMMARY .............................. 9
FINANCIAL STATEMENTS ............................. 10
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
During the six months ended May 31, 1998, a vigorous financial environment
that featured a surging stock market and solid returns from bonds helped drive
Vanguard Convertible Securities Fund to a strong half-year performance. The
Fund's +7.9% return outpaced both its comparative index and the average
convertible securities mutual fund.
The adjacent table shows the Fund's total return (capital change plus
reinvested dividends) for the fiscal half-year as well as those of the average
convertible securities fund and of our principal unmanaged benchmark, the Credit
Suisse First Boston Convertible Securities Index. Also represented are the
six-month returns for two relevant broad market indexes: the Standard & Poor's
500 Composite Stock Price Index and the Lehman Brothers Aggregate Bond Index.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SIX MONTHS ENDED
MAY 31, 1998
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<S> <C>
Vanguard Convertible Securities Fund + 7.9%
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Average Convertible Securities Fund + 6.6%
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CS First Boston Convertible
Securities Index + 6.6%
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S&P 500 Index + 15.1%
Lehman Aggregate Bond Index + 4.1
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</TABLE>
The Fund's return is based on a change in net asset value from $13.01 per
share on November 30, 1997, to $12.48 per share on May 31, 1998, with the latter
figure adjusted for dividends of $0.32 per share paid from net investment income
and a distribution of $1.12 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy kept growing at a robust pace, inflation remained tame, and
interest rates declined during the six months ended May 31. Consumer spending,
fueled by plentiful jobs and rising wages, was the engine powering the economy.
Stock prices advanced strongly through the first five months of the period, then
retreated a bit during May. Large-capitalization stocks were the strongest
performers, and the large-cap-dominated S&P 500 Index earned +15.1%, more than
double the +6.5% return of the small-cap Russell 2000 Index.
Bond investors also enjoyed solid returns during the six months. The Lehman
Aggregate Bond Index, a good measure of the overall taxable bond market,
returned +4.1%. Long-term bonds, which benefit more than other bonds from
declining interest rates, did even better: the Lehman Long Corporate AA or
Better Bond Index returned +5.6%.
Yields on long-term U.S. Treasury bonds declined on balance during the
half-year by approximately 25 to 30 basis points (0.25 to 0.30 percentage
point). The yield on the 30-year Treasury bond ended the period at 5.80%, down
from 6.05% on November 30, 1997, while rates on 3-month T-bills declined by 19
basis points, from 5.20% to 5.01%. The rate decline stemmed from remarkably good
inflation news--consumer prices were up just 0.8% during the period--and a
conviction among market participants that one consequence of Asia's continuing
economic crisis would be to keep a lid on inflation and interest rates in the
United States.
Convertible Securities Fund earned a sound +7.9% for the period, outpacing
by more than a full percentage point the +6.6% return for both the Fund's
comparative index and
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the average convertible securities fund. The Fund benefited generally from
the favorable climate of the U.S. markets. In addition, its reliance on
relatively stable convertibles--compared with the more volatile common stocks
that many convertible securities funds employ to supplement their
portfolios--made it a particularly safe haven during the stormy last month of
the half-year. Of course, because most convertible securities are issued by
small- and medium-sized companies, their earnings growth generally fell short of
results posted by their large-capitalization counterparts, which dominate the
S&P 500 Index.
Also responsible for Convertible Securities Fund's lead over its benchmarks
was good security selection by its adviser, who excelled in deciding not only
which convertible preferred stocks to hold but also, importantly, which to
avoid.
IN SUMMARY
The excellent returns from financial markets during the first half of
Convertible Securities Fund's fiscal year marked a continuance of a long-term
bull market for stocks and bonds that began more than 15 years ago.
Clearly, such superb returns will not continue indefinitely. There will
be bumps along the road from time to time. History--and common sense--teach that
to reap the rewards of financial markets, investors must endure risks that can
be considerable. A balanced approach to investing--holding stocks, bonds, and
cash reserves in proportions that fit each investor's time horizon, financial
situation, and objectives--is a proven strategy for balancing the risks and
rewards of the markets. We believe convertible securities--which offer greater
income potential than stocks, greater appreciation potential than bonds, and a
moderate exposure to overall risk--to be a sensible investment option,
particularly in times of financial volatility.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
June 23, 1998
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THE MARKETS IN PERSPECTIVE
Six Months Ended May 31, 1998
The U.S. financial markets turned in another excellent performance during the
half-year ended May 31. The stock market's gains would have been good even for
a full year, and the bond market chalked up solid returns.
Consumer spending was the economy's locomotive. Americans spent freely on
houses, automobiles, and just about everything else. Their spirits were buoyed
by a very strong job market--the nation's unemployment rate was 4.3% in May,
tying a 28-year low--and by higher wages (average hourly earnings in May were
4.3% higher than a year before). Growth in the consumer sector, which accounts
for two-thirds of all economic activity, was more than enough to offset the
negative effects of Asia's financial and economic crisis. A strong rise in the
value of the U.S. dollar since mid-1997 in relation to most Asian currencies has
cut into U.S. exports to Asia while lowering the cost of Asian goods for
American buyers. The upshot is intensifying competition for U.S. companies, some
of which have blamed the Asian crisis for reduced profits.
The silver lining in the Asian cloud is that, by offsetting some of the
strength elsewhere in the U.S. economy, it has reduced inflationary pressures.
Ordinarily, low unemployment, rising wages, and a rapidly growing economy might
be expected to push up consumer prices. But thanks in part to lower-priced Asian
imports, inflation has been remarkably well behaved--the Consumer Price Index
rose just 0.8% during the six months ended May 31. Benign inflation and a
conviction that the Asian situation will keep the Federal Reserve Board from
raising interest rates anytime soon allowed interest rates to decline.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED MAY 31, 1998
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.1% 30.7% 22.2%
Russell 2000 Index 6.5 21.2 16.1
MSCI EAFE Index 16.2 11.4 9.8
- --------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 4.1% 10.9% 7.1%
Lehman 10-Year Municipal Bond Index 3.8 9.3 6.9
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.7 5.3 4.9
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OTHER
Consumer Price Index 0.8% 1.7% 2.5%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Stock prices rose in each of the first five months of the period before
declining in May. Gains were largest for large-capitalization stocks. The S&P
500 Index, which is dominated by large-cap stocks, earned a total return of
15.1%, while the rest of the stock market, as measured by the Wilshire 4500
Equity Index, returned 10.4%. The Russell 2000 Index, focusing on small-cap
stocks, gained 6.5%.
Stock prices were supported by declining interest rates and the
surprisingly low inflation rate, which led to an expansion of price/earnings
multiples investors were willing to pay for stocks. The news on corporate
earnings, another key fundamental in stock valuation, was not so positive.
Corporate earnings in the January-March quarter were up by less than 5% from the
previous year, and securities analysts steadily reduced their estimates
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of earnings for the full year. Concern about meager growth in profits--partly
because of increased competition from Asia--was a factor in the stock market's
decline from record highs set in late April.
The consumer spending boom was reflected in the stock market's performance.
The best-performing sector was auto & transportation stocks. This segment of the
S&P 500 Index earned 28.6% for the six months. The consumer discretionary
sector, which makes up 10% of the Index, was up 23.0% for the half-year, and
health-care stocks, which make up nearly 12% of the S&P 500, gained 22.2%. Lower
oil prices were to blame for the two weakest sectors--integrated oil companies
(up 8.2%) and the "other energy" group (down 6.3%).
U.S. FIXED-INCOME MARKETS
The decline in interest rates during the period meant that bond investors saw
modest price increases along with their interest income. The Lehman Brothers
Aggregate Bond Index, a yardstick for the overall taxable bond market, earned
4.1%, bringing its return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.2%. Bonds benefited from both an easing of
inflation fears and, reportedly, from a "flight to quality" by Asian investors
who some analysts believe bought U.S. Treasury securities to protect themselves
from further declines in their currencies versus the U.S. dollar.
The rate decline was more pronounced for longer-term bonds. While yields on
3-month Treasury bills declined 19 basis points (0.19 percentage point) during
the half-year, yields on 10- and 30-year Treasuries fell by 32 and 25 basis
points, respectively, to 5.55% and 5.80%. The flattening of the yield curve
during the period signaled that market participants expect interest rates to
remain stable or to decline further. No one knows whether that expectation will
prove correct, but investors certainly are being paid very little to bear the
higher risk of price fluctuations that comes with longer-term bonds. As of May
31, the yield on 10-year Treasuries was only 2 basis points higher than the
5.53% yield on 3-year Treasuries, even though the price of a 10-year note is
three times more sensitive to changes in interest rates than that of a 3-year
note.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets made Wall Street's bull market look like a mere calf
during the first half of the fiscal year, while Asian markets slumped under the
weight of falling currencies and weakening economic activity. Overall, the
Morgan Stanley Capital International Europe, Australasia, Far East Index rose
16.2% in U.S. dollar terms. Its European component was up a remarkable 29.7% in
U.S. dollar terms and an even- stronger 32.7% in local currencies. A
strengthening in the dollar versus other currencies slightly cut returns for
American investors.
Several factors were credited for Europe's bull market, including a
recovery in economic activity across the continent and an increase in U.S.-style
efforts to boost shareholder value, including share repurchases, corporate
restructurings, and mergers. In addition, investors seemed pleased at the smooth
progress toward the January 1, 1999, adoption by 11 countries of a common
currency, the euro.
In the Pacific, stock markets were, on balance, down 2.7% in local-currency
terms. But a weakening of the Japanese yen and several other currencies versus
the U.S. dollar resulted in a decline of 9.9% in U.S. dollar terms. Japan, the
dominant Pacific Rim economy and stock market, officially acknowledged that its
economy had fallen into a recession. A number of investors, analysts, and others
criticized the Japanese government for being slow to adopt economic reforms and
other measures to spur business activity.
4
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REPORT FROM THE ADVISER
The first half of Vanguard Convertible Securities Fund's 1998 fiscal year was
rewarding on both an absolute and relative basis. The Fund earned 7.9%,
moderately above the 6.6% return achieved by both of our principal benchmarks,
the average convertible securities fund and the unmanaged CS First Boston
Convertibles Index.
Several factors, some positive and others negative, influenced our
first-half results. On the negative side, our few holdings in the technology
sector were weak performers because of slowing demand for personal computers and
Asia's continued economic turmoil. Our energy holdings also underperformed as
oil prices slumped. Company-specific problems led to disappointments in two
holdings: Sunbeam, which announced an earnings shortfall and is no longer a
holding of the Fund; and Cendant, which disclosed accounting irregularities.
Both convertibles held up exceptionally well given the sharp decline in their
underlying equities, but they hurt our performance nevertheless.
One positive influence on the Fund's return was our decision to take
profits by selling some appreciated holdings that later declined. Among these
were Time Warner, USA Waste Services, and International Paper. The other major
positive factor in the Fund's performance was our very selective stance toward
new issues. We passed on many issues that were statistically and fundamentally
unattractive; several of these performed poorly after being issued.
As we consider the market today, we believe convertible valuations remain
reasonably cheap, given their combination of decent upside potential and
relatively limited downside risk. These attributes were clearly demonstrated
recently, as several convertibles significantly outperformed their underlying
common stocks when the stock prices declined. We expect the equity market to
remain volatile as debate continues over market and economic fundamentals, the
probability of a deterioration of those fundamentals, and the current high
valuations of many companies. In such an environment, investors may be attracted
to convertible securities, which ordinarily provide reasonable protection in
market downturns.
In summary, we would stress three points: (1) we perceive a high level of
uncertainty in the financial markets; (2) smaller stocks are selling at a
discount to the S&P 500 stocks; and (3) most convertibles are cheap by
statistical measures. For these reasons, we continue to feel that an investment
in convertible securities is very appropriate.
Oaktree Capital Management LLC
June 10, 1998
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
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PORTFOLIO PROFILE
Convertible Securities Fund
This Profile provides a snapshot of the Fund's characteristics as of May 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 7 and 8.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
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<S> <C>
Number of Securities 99
Yield 3.4%
Conversion Premium 35.3%
Average Weighted Maturity 5.7 years
Average Coupon 4.2%
Average Quality Ba
Average Duration 4.2 years
Foreign Holdings 10.2%
Turnover Rate 208%*
Expense Ratio 0.92%*
Cash Reserves 4.8%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Aaa/AAA 0.0%
Aa/AA 0.0
A/A 6.6
Baa/BBB 11.7
Ba/BB 13.3
B/B 29.5
Less than B/B 8.0
Not Rated 30.9
- -----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
CONVERTIBLE
SECURITIES S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.50 1.00
Beta 0.56 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
U.S. Filter Corp. 2.7%
Loews Corp. 2.4
WMX Technologies Inc. 2.1
Winstar Communications, Inc. 1.9
Thermo Electron Corp. 1.9
Network Associates Inc. 1.9
Healthsouth Corp. 1.8
APP Finance VII Mauritius 1.8
Suiza Capital Trust II 1.7
Kmart Financing 1.7
- -----------------------------------------------------------
Top Ten 19.9%
</TABLE>
<TABLE>
DISTRIBUTION BY MATURITY (% OF BONDS)
- ---------------------------------------------------------
<S> <C>
Under 1 Year 0.0%
1-5 Years 50.2
5-10 Years 49.8
10-20 Years 0.0
20-30 Years 0.0
Over 30 Years 0.0
- ---------------------------------------------------------
Total 100.0%
</TABLE>
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<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
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MAY 31, 1997 MAY 31, 1998
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CONVERTIBLE SECURITIES CONVERTIBLE SECURITIES
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<S> <C> <C>
Auto & Transportation 5.6% 6.2%
Consumer Discretionary 28.1 25.8
Consumer Staples 0.0 3.9
Financial Services 12.5 8.9
Health Care 10.2 11.5
Integrated Oils 0.0 0.0
Other Energy 8.4 4.0
Materials & Processing 3.0 2.8
Producer Durables 11.3 10.9
Technology 14.0 13.1
Utilities 5.8 11.1
Other 1.1 1.8
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</TABLE>
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers.
AVERAGE WEIGHTED MATURITY. The average length of time until securities held by a
portfolio reach maturity (or are called) and are repaid. In general, the longer
the average weighted maturity, the more a portfolio's share price will fluctuate
in response to changes in market interest rates.
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BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
CONVERSION PREMIUM. The average percentage by which the weighted average market
price of the convertible securities held by a portfolio exceeds the weighted
average market price of their underlying common stocks. For example, if a stock
is trading at $25 per share and a bond convertible into the stock is trading at
a price equivalent to $30 per share of stock, the conversion premium is 20% ($5
/ $25 = 20%).
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
securities of companies based outside the United States.
NUMBER OF SECURITIES. An indicator of diversification. The more separate issues
a portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular security.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentages of a portfolio's securities that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days and is annualized, or projected forward for
the coming year.
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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 an investment in the Fund could
lose money.
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES FUND
TOTAL INVESTMENT RETURNS: JUNE 17, 1986-MAY 31, 1998
- ----------------------------------------------------------
CONVERTIBLE SECURITIES FUND FIRST
BOSTON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<C> <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 10.6 4.2 14.8 15.4
1998** 5.2 2.7 7.9 6.6
- ----------------------------------------------------------
</TABLE>
*CS First Boston Convertible Securities Index.
**Six months ended May 31, 1998.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- --------------------------------------------------------------------------------------------------------------------------
INCEPTION 10 YEARS
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Convertible Securities Fund 6/17/1986 27.18% 12.13% 7.13% 5.51% 12.64%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
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<PAGE> 12
FINANCIAL STATEMENTS
May 31, 1998 (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 (69.1%)
- -----------------------------------------------------------
AUTO & TRANSPORTATION (3.4%)
Magna International Inc.
4.875%, 2/15/2005 $2,300 $ 2,579
MascoTech Inc.
4.50%, 12/15/2003 1,915 1,834
Offshore Logistics Inc.
6.00%, 12/15/2003 500 554
Tower Automotive Inc.
5.00%, 8/1/2004 1,780 1,947
---------
6,914
---------
CONSUMER DISCRETIONARY (19.4%)
(1)AMF Bowling, Inc.
0.00%, 5/12/2018 13,460 3,365
(1)Brightpoint, Inc.
0.00%, 3/11/2018 5,175 2,161
CapStar Hotel Co.
4.75%, 10/15/2004 2,205 1,918
(1)CKE Restaurants Inc.
4.25%, 3/15/2004 3,575 3,275
COREStaff Inc.
2.94%, 8/15/2004 3,320 3,054
CUC International, Inc.
3.00%, 2/15/2002 2,740 2,725
Equity Corp. International
4.50%, 12/31/2004 1,975 2,106
Fine Host Corp.
5.00%, 11/1/2004 2,085 1,647
Hilton Hotels Corp.
5.00%, 5/15/2006 2,120 2,319
IMAX Corp.
5.75%, 4/1/2003 645 852
Interim Services Inc.
4.50%, 6/1/2005 2,650 2,726
The Interpublic Group of Cos.,
Inc. 1.80%, 9/16/2004 3,555 3,244
Jacor Communications, Inc.
0.00%, 2/9/2018 7,960 3,283
May & Speh, Inc.
5.25%, 4/1/2003 1,535 1,888
Premiere Technologies, Inc.
5.75%, 7/1/2004 2,180 2,205
Scandinavian Broadcasting
7.00%, 12/1/2004 1,315 1,631
Tele-Communications International
4.50%, 2/15/2006 815 691
---------
39,090
---------
CONSUMER STAPLES (1.3%)
Rite Aid Corp.
5.25%, 9/15/2002 2,165 2,595
---------
ENERGY (1.7%)
Aker RGI ASA
5.25%, 7/23/2002 500 555
(1)Lomak Petroleum
6.00%, 2/1/2007 630 591
Pride International, Inc.
0.00%, 4/24/2018 5,855 2,342
---------
3,488
---------
FINANCIAL SERVICES (5.4%)
Affiliated Computer Services
4.00%, 3/15/2005 2,045 2,087
Loews Corp.
3.125%, 9/15/2007 4,785 4,734
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- -----------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------
<S> <C> <C>
National Data Corp.
5.00%, 11/1/2003 740 734
(1)Security Capital U.S. Realty
2.00%, 5/22/2003 4,055 3,297
---------
10,852
---------
HEALTH CARE (11.0%)
ALZA Corp.
5.00%, 5/1/2006 900 1,262
Assisted Living Concepts, Inc.
6.00%, 11/1/2002 1,995 1,963
Aviron
5.75%, 4/1/2005 2,350 2,556
(1)Centocor, Inc.
4.75%, 2/15/2005 2,820 2,957
(1)Concentra Managed Care, Inc.
4.50%, 3/15/2003 1,660 1,444
ESC Medical Systems Ltd.
6.00%, 9/1/2002 1,270 1,175
(1)Genzyme Corp.
5.25%, 6/1/2005 255 253
(1)Healthsouth Corp.
3.25%, 4/1/2003 3,565 3,583
NCS HealthCare, Inc.
5.75%, 8/15/2004 1,830 1,995
Omnicare, Inc.
5.00%, 12/1/2007 2,050 2,293
(1)Sepracor, Inc.
6.25%, 2/15/2005 2,200 2,555
---------
22,036
---------
MATERIALS & PROCESSING (1.8%)
(1)APP Finance VII Mauritius
3.50%, 4/30/2003 4,540 3,541
---------
PRODUCER DURABLES (9.9%)
SPACEHAB, Inc.
8.00%, 10/15/2007 985 1,088
Thermo Electron Corp.
4.25%, 1/1/2003 3,535 3,782
(1)Thermo Fibertek Inc.
4.50%, 7/15/2004 2,300 2,429
Thermo Instrument System
4.00%, 1/15/2005 2,875 2,911
U.S. Filter Corp.
4.50%, 12/15/2001 5,065 5,432
WMX Technologies Inc.
2.00%, 1/24/2005 4,425 4,209
---------
19,851
---------
TECHNOLOGY (10.5%)
Advanced Micro Devices, Inc.
6.00%, 5/15/2005 2,270 2,060
Amkor Technology, Inc.
5.75%, 5/1/2003 2,360 2,384
(1)Atmel Corp.
0.00%, 4/15/2018 7,230 2,232
Cirrus Logic Inc.
6.00%, 12/15/2003 250 197
ComverseTechnology, Inc.
5.75%, 10/1/2006 1,910 2,366
(1)Gilat Satellite Networks Ltd.
6.50%, 6/3/2004 1,790 1,850
Level One Communications, Inc.
4.00%, 9/1/2004 345 413
Network Associates Inc.
0.00%, 2/13/2018 8,620 3,750
Tecnomatix Technologies Ltd.
5.25%, 8/15/2004 1,225 1,027
(1)Western Digital Corp.
0.00%, 2/18/2018 8,550 2,907
Wind River Systems, Inc.
5.00%, 8/1/2002 1,910 1,877
---------
21,063
---------
UTILITIES (3.2%)
(1)Bell Atlantic Financial Services
5.75%, 4/1/2003 3,105 3,218
Tel-Save Holdings, Inc.
4.50%, 9/15/2002 2,195 2,061
5.00%, 12/15/2004 1,275 1,197
---------
6,476
---------
OTHER (1.5%)
(1)Triarc Cos. Inc.
0.00%, 2/9/2018 11,050 3,122
---------
- -----------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(COST $138,818) 139,028
- -----------------------------------------------------------
<CAPTION>
SHARES
- -----------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (26.1%)
- -----------------------------------------------------------
AUTO & TRANSPORTATION (2.5%)
- -(1)Coltec Capital Trust 5.25%
Cvt. Pfd. 40,800 2,030
(1)Fleetwood Capital Trust 6.00%
Cvt. Pfd. 43,100 2,300
- -(1)Union Pacific Capital Trust 6.25%
Cvt. Pfd. 12,900 640
---------
4,970
---------
CONSUMER DISCRETIONARY (5.1%)
Big Flower Press Trust 6.00%
Cvt. Pfd. 7,200 450
Cendant Corp. 7.50% Cvt. Pfd. 59,500 2,246
Hollinger International, Inc.
9.75% Cvt. Pfd. 141,100 1,922
Kmart Financing 7.75% Cvt. Pfd. 49,100 3,483
Metromedia International
Group, Inc. 7.25% Cvt. Pfd. 38,100 2,134
---------
10,235
---------
CONSUMER STAPLES (2.5%)
- - CVS Corp. 6.00% Cvt. Pfd. 20,900 1,467
- -(1)Suiza Capital Trust II
5.50% Cvt. Pfd. 72,000 3,492
---------
4,959
---------
ENERGY (2.1%)
- -(1)Chesapeake Energy Corp. 7.00%
Cvt. Pfd. 48,000 2,226
- - El Paso Energy Capital Trust I
4.75% Cvt Pfd. 36,400 1,966
---------
4,192
---------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------
MARKET
VALUE*
CONVERTIBLE SECURITIES FUND SHARES (000)
- -----------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES (3.1%)
Conseco Finance Trust 7.00%
Cvt. Pfd. 63,300 $ 3,256
Crescent Real Estate, Inc. REIT
6.75% Cvt. Pfd. 78,200 1,935
- -(1)Innkeepers USA Trust 8.625%
Cvt. Pfd. 43,600 1,068
---------
6,259
---------
MATERIALS & PROCESSING (0.9%)
- - Owens-Illinois Inc. 4.75%
Cvt. Pfd. 35,300 1,853
---------
PRODUCER DURABLES (0.5%)
QUALCOMM Financial Trust 5.75%
Cvt. Pfd 21,900 1,042
---------
TECHNOLOGY (2.0%)
- - Cellnet Data Systems 7.00%
Cvt. Pfd. 43,600 1,063
- -(1)Lernout & Hauspie Speech
Products N.V. 4.75% Cvt. Pfd. 54,200 3,035
---------
4,098
---------
UTILITIES (7.4%)
AES Trust II 5.50% Cvt. Pfd. 42,500 2,316
CalEnergy $3.13 Cvt. Pfd. 16,200 919
CalEnergy Capital Trust II 6.25%
Cvt. Pfd. 18,800 884
- -(1)IXC Communications Inc. 6.75%
Cvt. Pfd. 63,800 2,931
Intermedia Communications, Inc.
7.00% Cvt. Pfd. 77,500 2,692
- -(1)NEXTLINK Communications, Inc.
6.50% Cvt. Pfd. 24,700 1,189
- - Winstar Communications, Inc.
6.00% Cvt. Pfd. 567 24
- -(1)Winstar Communications, Inc.
7.00% Cvt. Pfd. 76,800 3,898
---------
14,853
---------
- -----------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $50,540) 52,461
- -----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------
TEMPORARY CASH INVESTMENTS (10.0%)
- -----------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.56%, 6/1/1998--Note F $13,282 13,282
5.57%, 6/1/1998 6,891 6,891
- -----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $20,173) 20,173
- -----------------------------------------------------------
TOTAL INVESTMENTS (105.2%)
(COST $209,531) 211,662
- -----------------------------------------------------------
<CAPTION>
MARKET
VALUE*
(000)
- -----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.2%)
- -----------------------------------------------------------
Other Assets--Note C $ 7,455
Security Lending Collateral Payable
to Brokers--Note F (13,282)
Other Liabilities (4,687)
---------
(10,514)
- -----------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------
Applicable to 16,114,760 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $201,148
===========================================================
NET ASSET VALUE PER SHARE $12.48
===========================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security. New issue that has not paid a dividend as of
May 31, 1998.
(1)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, 1998, the aggregate
value of these securities was $65,589,000, representing 32.6% of net assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
AT MAY 31, 1998, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------
<S> <C> <C>
Paid in Capital $184,231 $11.43
Undistributed Net
Investment Income 1,055 .07
Accumulated Net
Realized Gains 13,731 .85
Unrealized Appreciation--
Note E 2,131 .13
- -----------------------------------------------------------
NET ASSETS $201,148 $12.48
===========================================================
</TABLE>
12
<PAGE> 15
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, 1998
(000)
- --------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 1,328
Interest 3,303
---------
Total Income 4,631
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 407
Performance Adjustment 178
The Vanguard Group--Note C
Management and Administrative 246
Marketing and Distribution 26
Taxes (other than income taxes) 7
Custodian Fees 15
Auditing Fees 4
Shareholders' Reports 17
Annual Meeting and Proxy Costs 1
---------
Total Expenses 901
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,730
- --------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 13,628
- --------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (2,895)
- --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,463
========================================================================================================
</TABLE>
13
<PAGE> 16
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 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, 1998 NOV. 30, 1997
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,730 $ 7,520
Realized Net Gain 13,628 16,197
Change in Unrealized Appreciation (Depreciation) (2,895) 169
---------------------------------
Net Increase in Net Assets Resulting from Operations 14,463 23,886
---------------------------------
DISTRIBUTIONS
Net Investment Income (4,777) (6,451)
Realized Capital Gain (16,111) (16,736)
---------------------------------
Total Distributions (20,888) (23,187)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 22,707 43,991
Issued in Lieu of Cash Distributions 18,818 20,712
Redeemed (23,056) (46,022)
---------------------------------
Net Increase from Capital Share Transactions 18,469 18,681
- ----------------------------------------------------------------------------------------------------------
Total Increase 12,044 19,380
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 189,104 169,724
---------------------------------
End of Period $201,148 $189,104
==========================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,826 3,549
Issued in Lieu of Cash Distributions 1,618 1,761
Redeemed (1,862) (3,766)
---------------------------------
Net Increase in Shares Outstanding 1,582 1,544
==========================================================================================================
</TABLE>
14
<PAGE> 17
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 Securities and Exchange Commission 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, 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.01 $13.07 $12.03 $10.94 $12.89 $11.77
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .53 .43 .52 .53 .56
Net Realized and Unrealized Gain (Loss)
on Investments .66 1.17 1.29 1.26 (1.04) 1.03
------------------------------------------------------------------------
Total from Investment Operations .91 1.70 1.72 1.78 (.51) 1.59
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.47) (.54) (.51) (.53) (.47)
Distributions from Realized Capital Gains (1.12) (1.29) (.14) (.18) (.91) --
------------------------------------------------------------------------
Total Distributions (1.44) (1.76) (.68) (.69) (1.44) (.47)
==========================================================================================================================
NET ASSET VALUE, END OF PERIOD $12.48 $13.01 $13.07 $12.03 $10.94 $12.89
==========================================================================================================================
TOTAL RETURN 7.90% 14.81% 14.88% 17.10% -4.35% 13.87%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $201 $189 $170 $172 $175 $202
Ratio of Total Expenses to
Average Net Assets 0.92%* 0.67% 0.69% 0.75% 0.73% 0.71%
Ratio of Net Investment Income to
Average Net Assets 3.80%* 4.29% 3.43% 4.63% 4.68% 4.44%
Portfolio Turnover Rate 208%* 182% 97% 46% 52% 81%
Average Commission Rate Paid $.0569 $.0593 $.0594 N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
15
<PAGE> 18
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: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the latest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Temporary cash investments are valued at cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Directors to represent fair 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
respective 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.
The basic fee is subject to quarterly adjustments based on performance relative
to the Credit Suisse First Boston Convertible Securities Index. For the six
months ended May 31, 1998, the advisory fee represented an effective annual rate
of 0.41% of the Fund's average net assets before an increase of $178,000 (0.18%)
based on performance.
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, 1998,
the Fund had contributed capital of $12,000 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, 1998, the Fund purchased $197,728,000 of
investment securities and sold $200,112,000 of investment securities, other than
temporary cash investments.
E. At May 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $2,131,000, consisting
of unrealized gains of $8,477,000 on securities that had risen in value since
their purchase and $6,346,000 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, 1998,
was $12,630,000, for which the Fund held cash collateral of $13,282,000. Cash
collateral received is invested in repurchase agreements.
16
<PAGE> 19
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior 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
Chairman, 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 Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; 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 Telecommunications 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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 20
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
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Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q822-5/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
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
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 you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
