<PAGE> 1
VANGUARD
CONVERTIBLE
SECURITIES FUND
[PHOTO]
Annual
Report
November 30, 1998
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at
its beginning nearly 25 years ago: a stress on balanced, diversified
investments; insistence on fair dealing and candor with clients; and a focus
on long-term investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is one
of only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
6
REPORT FROM
THE ADVISER
8
FUND PROFILE
10
PERFORMANCE SUMMARY
13
FINANCIAL STATEMENTS
14
REPORT OF
INDEPENDENT ACCOUNTANTS
22
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & Ceo Senior Chairman
Vanguard Convertible Securities Fund had a negative return of -2.2% during the
fiscal year ended November 30, 1998. Although large-capitalization stocks
enjoyed big gains during the year, it was a difficult period for the mid-cap and
small-cap stocks into which most of our holdings are convertible.
The table below presents the fund's total return (capital change plus
reinvested dividends) along with those of the average convertible securities
fund and the Credit Suisse First Boston Convertible Securities Index. As you can
see, we trailed the modest positive returns earned by our comparative standards.
For the record, we also present the returns of the Standard & Poor's 500
Composite Stock Price Index, a widely used benchmark for stocks, and of the
Lehman Brothers Aggregate Bond Index, a proxy for the overall bond market.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
NOVEMBER 30, 1998
- -----------------------------------------------------------
<S> <C>
Vanguard Convertible Securities Fund - 2.2%
- -----------------------------------------------------------
Average Convertible Securities Fund + 1.9%
- -----------------------------------------------------------
CS First Boston Convertibles Index + 1.4%
- -----------------------------------------------------------
S&P 500 Index +23.7%
Lehman Aggregate Bond Index + 9.5%
- -----------------------------------------------------------
</TABLE>
Our total return was based on a decline in net asset value from $13.01 per share
on November 30, 1997, to $11.10 per share on November 30, 1998, adjusted for
dividends totaling $0.54 per share from net investment income and distributions
made in December 1997 totaling $1.12 per share from net realized capital gains.
At fiscal year-end, the fund's dividend yield was 4.23%.
FINANCIAL MARKETS IN REVIEW
The U.S. economy expanded at a robust pace during the fiscal year, despite
serious financial troubles that beset Asia, Russia, and Latin America. The
domestic economy's growth was fueled primarily by big increases in consumer
spending encouraged by low unemployment (4.4% as the fiscal year ended) and
strong wage growth (about 4%, well in excess of the 1.5% inflation rate).
The same optimistic spirit that sent consumers flocking to automobile
showrooms and shopping malls pervaded the nation's financial markets. Stock
prices rose strongly through the first half of the fiscal year, even though
corporate earnings slid a bit from the previous year's levels. By July 17, the
S&P 500 Index was up 25% from where it began the fiscal year. However, stock
prices fell sharply in the ensuing six weeks, with the S&P 500 enduring a -19.2%
decline that culminated in a -6.8% drop on August 31. Importantly, smaller
stocks, whose prices had peaked back in April, fared worse: The Russell 2000
Index of small-capitalization stocks was down nearly -40% before it began to
bounce back.
The market's rebound began in September, and stock prices rose sharply
during the final quarter of the fiscal year. By fiscal year-end, the S&P 500
Index was back in near-record territory. However, the +23.7% annual return of
the large-cap-dominated
1
<PAGE> 4
S&P 500 was far from indicative of the rest of the market. Stocks outside the
S&P 500, as represented by the Wilshire 4500 Equity Index, returned just +2.6%
for the fiscal year. The small-cap Russell 2000 Index declined -6.6%.
Interest rates fell during the fiscal year, with the yield of the 30-year
U.S. Treasury bond declining on balance by about 1 percentage point to end the
year at 5.06%. Bond prices--particularly for Treasury issues--benefited from
buying by investors who sought a haven from the volatility in U.S. stocks and in
overseas securities and currency markets. Concerns about the impact of the
international economic situation on both the world's markets and the U.S.
economy were cited by the Federal Reserve Board as a factor in its decision to
cut short-term interest rates. The Fed shaved rates by one-quarter of a
percentage point on three occasions: September 29, October 15, and November 17.
The Lehman Aggregate Bond Index, a benchmark for the overall bond market,
achieved a +9.5% return during the fiscal year.
FISCAL 1998 PERFORMANCE OVERVIEW
After gaining +7.9% during the first half of the fiscal year, Vanguard
Convertible Securities Fund posted a -9.3% decline during the second half,
ending fiscal 1998 with a -2.2% return. Our performance was 4.1 percentage
points behind the +1.9% return of the average convertible securities fund and
3.6 percentage points lower than the +1.4% recorded by our benchmark index.
Three factors accounted for our shortfall versus our average peer. First,
our competitors owned a higher percentage of convertible preferred stocks (as
distinct from convertible bonds), whose prices benefited from strong demand
during the fiscal year. Second, the average convertible fund invested roughly
12% of its assets in common stocks, while your fund held almost exclusively
convertible securities. Finally, our competitors tended to hold more
cash--roughly 9% of net assets versus our 2% commitment--providing them a small
cushion against declines in the prices of convertible issues during the second
half of the year.
We lagged the CS First Boston Convertibles Index chiefly because
convertible securities of large-cap companies make up a bigger part of the index
than of our fund. As mentioned earlier, large-cap stocks dominated their
small-cap brethren to a remarkable extent during the fiscal year, a disparity
that influenced the relative performance of the securities convertible into
those stocks. Although large-cap issues have dominated the stock market's
performance in recent years, we believe that smaller stocks will--as they have
in the past--also enjoy periods when they are the market's leaders.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents the average annual returns earned during the last
decade by the Convertible Securities Fund, our average peer, and the unmanaged
index. It also shows the value of hypothetical $10,000 investments made ten
years ago in the fund and our benchmarks, assuming the reinvestment of income
and capital gains distributions. During this period, our fund's
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED NOVEMBER 30, 1998
---------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Convertible Securities Fund +10.9% $28,093
- --------------------------------------------------------------------------------
Average Convertible Securities Fund +11.0% $28,519
- --------------------------------------------------------------------------------
CS First Boston Convertibles Index +11.9% $30,865
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 5
return trailed that of its average peer by a tiny margin (0.1 percentage point),
and neither result matched the return of the index. A $10,000 investment in
Vanguard Convertible Securities Fund would have grown over the decade to
$28,093, or $426 less than the $28,519 that would have accumulated in the
average convertible fund. We lagged the index by a full percentage point
annually, or by $2,772 on a $10,000 investment.
We are disappointed that our long-term performance has fallen
short--however modestly--of our comparative benchmarks. We certainly aim to do
better. That said, we note that Oaktree Capital Management has concluded just
its second full fiscal year as the fund's investment adviser. We believe
Oaktree's investment approach is sound and will prove fruitful over the long
term. In our effort to outperform our peers, we have the advantage of a low
expense ratio. Our operating costs amounted to 0.73% of average net assets
during fiscal 1998, less than half the 1.58% expense ratio charged by the
average convertible securities fund. Of course, any operating cost at all puts a
real-world investment portfolio at a disadvantage versus the index, which as a
theoretical construct incurs no management or administrative costs.
We note that the past decade was an unusually favorable period for
financial assets, including convertible securities. The average annual return of
+18.7% from stocks during the past decade was 70% above the long-term average
return of about +11% a year. Also, bond prices have risen considerably over the
past decade, reflecting the general decline in interest rates. We would not
count on a repeat of the golden decade just concluded. That said, with the
annual inflation rate running at less than 2%, it does not take extraordinary
gains to produce satisfactory real (inflation-adjusted) returns.
IN SUMMARY
Turbulence such as that experienced by investors during fiscal 1998 is rarely
pleasant. But it goes with the territory--fluctuations in returns are the risk
that investors must endure to reap the long-term rewards of financial assets.
We believe that a sensible way to manage the risks and rewards of
investing is to match up your goals, investment time horizon, personal
situation, and tolerance for risk with the appropriate mix of stocks, bonds, and
reserves. Convertible securities, which exhibit characteristics of both bonds
and common stocks, can be a sensible ingredient in such a balanced mix of
assets. In any event, once you have such a program in place, you should be
prepared to "stay the course" through the inevitable ups and downs that the
markets will throw your way.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
December 14, 1998
3
<PAGE> 6
NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard Convertible
Securities Fund overwhelmingly approved five proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. Based on the fund's assets at
the time of the vote, this change will reduce the amount of state taxes the fund
pays annually by approximately $14,700. Approved by 97.18% of the shares voted,
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------
<S> <C> <C>
9,992,929 117,139 172,524
---------------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the Convertible Securities Fund to participate in Vanguard's interfund
lending program, which allows funds to loan money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of the fund's investment
program; it is a contingency arrangement for managing unusual cash flows.
Approved by 93.51% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------
<S> <C> <C>
9,615,537 439,991 227,064
---------------------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 91.90% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------
<S> <C> <C>
9,449,463 520,045 313,084
---------------------------------------------------------------
</TABLE>
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminates the fund's policy of avoiding investments in
securities that are owned in certain amounts by Trustees, officers, and key
advisory personnel. This policy was well-intentioned but wrongly focused and
unnecessary in light of the fund's Code of Ethics and other regulatory
protections against conflicts of interest on the part of fund management.
Approved by 91.44% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------
<S> <C> <C>
9,402,874 540,050 339,668
---------------------------------------------------------------
</TABLE>
4
<PAGE> 7
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change eliminates the fund's policy of not investing more than 5% of net assets
in securities issued by companies that have fewer than three years of operating
history, taking into account any predecessors. The policy was unduly
restrictive. Approved by 89.55% of the shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------------------
<S> <C> <C>
9,207,826 698,850 375,916
---------------------------------------------------------------
</TABLE>
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
YEAR ENDED NOVEMBER 30, 1998
[PHOTO]
U.S. financial markets produced solid overall gains during the fiscal year ended
November 30. The S&P 500 Index gained 23.7% for the 12-month period, overcoming
a sharp summer setback. Bond prices rose as interest rates declined. Returns
from overseas stock markets varied widely, with big gains in Europe and losses
in most other markets.
U.S. STOCK MARKETS
The stock market's gains during the fiscal year were concentrated in
large-capitalization growth stocks. Within the S&P 500 Index, the growth stocks
rose 33.7%, while the value stocks were up 13.2%. The market's overall bias
toward large-caps showed starkly in the contrast between the S&P 500 and other
indexes. While the S&P 500 was rising 23.7%, the rest of the market returned a
paltry 2.6%, as measured by the Wilshire 4500 Equity Index. Small-cap stocks, as
represented by the Russell 2000 Index, did even worse--a negative return of
6.6%.
The market's ascent was not without incident, even for large-cap stocks.
After rising strongly to a record high on July 17, the S&P 500 fell by 19.2%
during the following six weeks, just shy of the 20% mark generally considered
the boundary distinguishing a bear market from a mere "correction." Declines
were certifiably bearish for smaller stocks, however.
The July-August tumble in stock prices reflected a number of factors that
collectively raised the anxiety level for many investors. Among these were
deteriorating corporate earnings reports and forecasts, Russia's default on its
debts, and a continuance of economic weakness in Asia. The persistence of Asia's
economic troubles--which first surfaced in mid-1997--began to slow the economic
expansions in the United States and Europe.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED NOVEMBER 30, 1998
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 23.7% 26.7% 23.0%
Russell 2000 Index -6.6 10.3 11.3
MSCI EAFE Index 16.8 9.3 10.2
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 9.5% 7.7% 7.3%
Lehman 10 Year Municipal Bond Index 8.1 6.9 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.1 5.2 5.1
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 2.2% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
The rebound in stocks late in the fiscal year occurred even though
several sources of uncertainty remained, including doubts about global economic
growth and reductions in securities analysts' forecasts of future corporate
earnings. Stock prices got considerable help from the decline in interest rates.
(Low inflation and low interest rates help stock prices by raising the estimated
value of future dividends and earnings.)
Three forces clearly shaped the performance of industry sectors. They
could be summarized as faith (the buoyant confidence of consumers), fear
(related to the effects of economic troubles abroad), and fortresses (companies
somewhat protected from competition).
6
<PAGE> 9
In contrast to the cautious stance of investors during fiscal 1998, U.S.
consumers threw caution to the wind. Feeling flush because of plentiful jobs
(the nation's unemployment rate was 4.4% at fiscal year-end) and rising wages,
consumers spent a record proportion of their income. Not surprisingly, then, two
big gainers among sectors of the S&P 500 Index were consumer discretionary
firms, such as retailers (+26%) and consumer staples (+22%).
Fear was a factor in the lagging returns in industry groups considered to
be vulnerable to slowing global growth, falling commodity prices, and tougher
price competition from foreign suppliers. Among these--all traditional value
sectors--were firms in the "other energy" category (-37%); chemical and other
materials & processing firms (essentially a zero return); and makers of producer
durables such as airplanes and machinery (+2%). Conversely, utilities did well
(+35%) in part because they are seen as relatively insulated from foreign
competition or economic woes. Fortresses are companies perceived as relatively
safe from competitors because of patented products or brands. Such companies led
the year's best-performing sectors: technology (+49%) and health care (+43%).
U.S. BOND MARKETS
Interest rates declined during the fiscal year, especially for U.S. Treasury
securities, which benefited from heightened aversion to risk among investors and
from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The Federal Reserve Board had the flexibility to cut short-term rates
in three quarter-point steps in the autumn because inflation was remarkably
tame--consumer prices rose just 1.5% for our fiscal year.
In this bond-friendly environment, yields on long-term Treasury issues
fell by roughly 100 basis points (1 percentage point), with the 30-year Treasury
bond ending the fiscal year at 5.06%. Lower rates mean higher prices for bonds,
and the Lehman Brothers Long U.S. Treasury Bond Index earned a total return of
15.7%, an astounding margin of some 14 percentage points over the inflation
rate.
Reflecting investors' flight to quality and worries about slowing
economic growth, prices fell for high-yield "junk" bonds. Even high-quality
corporate bonds and mortgage-backed securities did not rise in price as far as
Treasury securities. Mortgage bonds tend to lag Treasuries during periods when
falling rates lead to greater refinancing activity by homeowners, resulting in
unwanted prepayments of principal. The Lehman Aggregate Bond Index, which
comprises high-quality corporate and mortgage-backed bonds as well as
Treasuries, and has an intermediate-term average maturity, earned 9.5%.
Yields on long-term municipal bonds declined only modestly during the
fiscal year, and by November 30 were only slightly lower than yields on
comparable Treasury securities. This was striking because the interest on
municipals is exempt from federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets outdistanced even the S&P 500 Index, but Asian and Latin
American markets were generally down during the fiscal year. As a group,
European stocks earned 27.8% in U.S.-dollar terms. Europe's bull market was
fueled by continuing economic growth, lower interest rates, increased corporate
merger activity, and optimism about the effects of the euro, a common currency
due to be adopted in 1999 by 11 nations.
Japan's stock market continued to suffer from the effects of a severe
recession and a shaky banking system. Stocks in Tokyo fell 4.5% in U.S.-dollar
terms. Elsewhere in Asia, returns were mixed, ranging from a rebound of 21% in
South Korea, through Australia's 11% gain, to big losses in Indonesia (-52%),
Malaysia (-42%), New Zealand (-25%), and Singapore (-18%). Losses were steep
throughout Latin America, including Mexico (-32%), Venezuela (-59%), Brazil
(-20%), and Chile (-22%).
7
<PAGE> 10
[PHOTO]
REPORT FROM THE ADVISER
The investment environment during Vanguard Convertible Securities Fund's fiscal
year ended November 30, 1998, was one of extremes--extreme optimism early in the
year and extreme pessimism late in the period. Both the convertible securities
market and the fund were affected by these trends, as well as by several other
cross currents.
The most important of these trends was the extremely wide gap in
performance between small-capitalization stocks and large-cap stocks. The return
of the S&P 500 Index was 23.7%, more than 30 percentage points ahead of the
- -6.6% return of the small-cap Russell 2000 Index. This large-cap/small-cap
dichotomy was the chief reason that your fund's return of -2.2% trailed the
1.4% return of its unmanaged benchmark, the Credit Suisse First Boston
Convertible Securities Index. The index is capitalization-weighted, so its
performance is affected heavily by convertible securities issued by large-cap
companies. Our holdings, on the other hand, include a number of issues from
mid- and small-cap firms. Therefore, the market's remarkable bias toward
large-cap stocks worked against us.
Unfortunately, many of these top-weighted convertible holdings are also
pure equity substitutes--convertibles selling at prices above 150% of par with
very negative yields to maturity--and thus they clearly lack the downside
protection on which we insist. Examples are issues from America Online (whose
common stock price was up 367% for the fiscal year), EMC (up 139%), Home Depot
(up 78%), and Tyco International (up 68%). Given the stock market's strong
preference for large-cap, domestically- oriented stocks, these equities and
their convertibles performed extremely well and gave our benchmark index a big
performance edge over convertible managers--like us--who will not own equity
substitutes.
The second factor that influenced our relative results was, ironically,
our discipline of selling highly appreciated holdings--which meant that we shed
the big-cap convertibles that went on to post the best performances. As usual,
we reinvested the proceeds in issues that were cheap on a statistical basis. In
1998, these relatively cheap securities happened to come from small- and mid-cap
companies. Thus, our selling discipline, which has proven itself over the long
haul, actually hurt our relative performance in 1998's highly unusual market
environment. In short, we are buyers of cheap issues, and during fiscal 1998 the
rich issues got richer while the cheap got cheaper.
Overall, our principal strategy remains what it has been: to take profits
on highly appreciated issues and reinvest the proceeds in securities that
provide our desired balance between equity appreciation potential and the strong
fixed-income properties that can act as a cushion in stock-market downturns.
8
<PAGE> 11
The fund remains well diversified with more than 80 issues representing a
wide variety of industrial groups. Convertible bonds with intermediate-term
maturities are still our primary focus. We will continue to restrict our
holdings to convertible securities that deliver an attractive balance between
upside potential and downside protection.
Oaktree Capital Management LLC
December 4, 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.
9
<PAGE> 12
FUND PROFILE
CONVERTIBLE SECURITIES FUND
This Profile provides a snapshot of the fund's characteristics as of November
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 11 and 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------------------
<S> <C>
Number of Issues 85
Yield 4.2%
Conversion Premium 31.1%
Average Weighted Maturity 5.4 years
Average Coupon 3.9%
Average Quality Ba
Average Duration 4.3 years
Foreign Holdings 12%
Turnover Rate 186%
Expense Ratio 0.73%
Cash Reserves 1.7%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------------------
<S> <C>
Aaa/AAA 0.0%
Aa/AA 0.0
A/A 5.8
Baa/BBB 14.1
Ba/BB 18.9
B/B 30.2
Less than B/B 1.5
Not Rated 29.5
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
CONVERTIBLE
SECURITIES S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.68 1.00
Beta 0.64 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Comverse Tech, Inc. 3.0%
Jacor Communications, Inc. 2.9
Network Associates Inc. 2.9
Office Depot Inc. 2.7
Union Pacific Capital Trust 2.4
WMX Technologies Inc. 2.3
Tower Automotive Inc. 2.3
Omnicare, Inc. 2.2
Metamor Worldwide, Inc. 2.2
Suiza Capital Trust II 2.1
- -------------------------------------------------------
Top Ten 25.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF BONDS)
- -------------------------------------------------------
<S> <C>
Under 1 Year 0.0%
1-5 Years 43.0
5-10 Years 55.0
10-20 Years 2.0
20-30 Years 0.0
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
- --------------------------------------------------------------------------------
NOVEMBER 30, 1997 NOVEMBER 30, 1998
--------------------------------------------------
CONVERTIBLE SECURITIES CONVERTIBLE SECURITIES
--------------------------------------------------
<S> <C> <C>
Auto & Transportation....... 4.7% 10.6%
Consumer Discretionary...... 31.3 19.3
Consumer Staples............ 4.3 3.7
Financial Services.......... 4.6 7.2
Health Care................. 12.7 14.0
Integrated Oils............. 0.0 1.5
Other Energy................ 9.1 2.0
Materials & Processing...... 0.4 2.6
Producer Durables........... 12.5 7.5
Technology.................. 9.1 22.3
Utilities................... 11.3 7.7
Other....................... 0.0 1.6
- --------------------------------------------------------------------------------
</TABLE>
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund'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 fund'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
fund reach maturity (or are called) and are repaid. In general, the longer the
average weighted maturity, the more a fund's share price will fluctuate in
response to changes in market interest rates.
11
<PAGE> 14
BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 fund 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 fund'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 fund's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a fund'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 fund's equity assets represented by
securities of companies based outside the United States.
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
fund 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 fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentages of a fund'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 fund has invested in
its ten largest holdings. As this percentage rises, a fund'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 past year. Funds
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 fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
12
<PAGE> 15
PERFORMANCE SUMMARY
CONVERTIBLE SECURITIES FUND
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>
TOTAL INVESTMENT RETURNS: JUNE 17, 1986-NOVEMBER 30, 1998
- ---------------------------------------------------------
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 10.6 4.2 14.8 15.4
1998 -6.4 4.2 -2.2 1.4
- ---------------------------------------------------------
</TABLE>
*CS First Boston Convertible Securities Index.
See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: NOVEMBER 30, 1988-NOVEMBER 30, 1998#
- ------------------------------------------------------------------------------
Convertible Average CS First Boston
Securities Convertible Convertibles
Fund Securities Fund Index
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1988 11 10000 10000 10000
1989 02 10536 10516 10689
1989 05 11485 11132 11419
1989 08 12184 11700 11918
1989 11 11770 11402 11627
1990 02 11452 11146 11325
1990 05 12201 11637 11788
1990 08 10990 10891 10997
1990 11 10482 10336 10618
1991 02 12012 11628 12004
1991 05 13133 12539 12791
1991 08 13549 12992 13388
1991 11 13547 12938 13230
1992 02 15548 14222 14770
1992 05 15465 14439 15099
1992 08 15656 14615 15307
1992 11 17070 15331 16103
1993 02 17378 15873 17032
1993 05 18294 16910 17971
1993 08 18804 17719 18831
1993 11 19438 17805 19199
1994 02 19831 18239 19756
1994 05 18580 17616 18646
1994 08 19254 18189 19329
1994 11 18592 17408 18455
1995 02 18848 17756 19178
1995 05 19858 19107 20725
1995 08 21376 20293 22476
1995 11 21772 20752 22880
1996 02 22288 21677 24146
1996 05 23847 22873 25472
1996 08 23567 22597 24788
1996 11 25011 24048 26391
1997 02 25599 24644 26883
1997 05 26359 25874 27823
1997 08 28390 27767 30223
1997 11 28715 27984 30452
1998 02 30719 29408 31981
1998 05 30983 30288 32468
1998 08 26002 26390 27980
1998 11 28093 28519 30865
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Securities Fund -2.16% 7.64% 10.88% $28,093
Average Convertible Securities Fund 1.91 9.88 11.05 28,519
CS First Boston Convertibles Index 1.36 9.96 11.93 30,865
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- -------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Convertible Securities Fund 6/17/1986 -11.52% 6.58% 4.85% 5.25% 10.10%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
13
<PAGE> 16
FINANCIAL STATEMENTS
NOVEMBER 30, 1998
[PHOTO]
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, 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)
- ----------------------------------------------------------------
CONVERTIBLE BONDS (73.3%)
- ----------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (6.1%)
Magna International Inc.
4.875%, 2/15/2005 $ 3,255 $ 3,475
MascoTech Inc.
4.50%, 12/15/2003 2,635 2,141
Offshore Logistics Inc.
6.00%, 12/15/2003 1,125 979
Tower Automotive Inc.
5.00%, 8/1/2004 3,625 3,896
-----------
10,491
-----------
CONSUMER DISCRETIONARY (16.2%)
Brightpoint, Inc.
0.00%, 3/11/2018 4,630 1,719
CKE Restaurants Inc.
4.25%, 3/15/2004 3,320 2,693
Clear Channel Communications, Inc.
2.625%, 4/1/2003 1,200 1,200
Costco Cos., Inc.
0.00%, 8/19/2017 1,585 1,205
Equity Corp. International
4.50%, 12/31/2004 2,195 2,579
Inacom Corp.
4.50%, 11/1/2004 945 839
Interim Services Inc.
4.50%, 6/1/2005 1,225 1,086
The Interpublic Group of Cos., Inc.
1.80%, 9/16/2004 1,665 1,717
Jacor Communications, Inc.
0.00%, 2/9/2018 11,275 5,074
Office Depot Inc.
0.00%, 12/11/2007 2,775 2,660
0.00%, 11/1/2008 2,590 2,056
Premiere Technologies, Inc.
5.75%, 7/1/2004 815 400
Scandinavian Broadcasting
7.00%, 12/1/2004 1,485 1,485
Tele-Communications International
4.50%, 2/15/2006 1,890 1,890
World Color Press, Inc.
6.00%, 10/1/2007 1,320 1,256
-----------
27,859
-----------
CONSUMER STAPLES (1.6%)
Rite Aid Corp.
5.25%, 9/15/2002 1,655 2,436
Whole Foods Market Inc.
0.00%, 3/2/2018 765 262
-----------
2,698
-----------
FINANCIAL SERVICES (3.3%)
Affiliated Computer Services
4.00%, 3/15/2005 1,725 1,874
National Data Corp.
5.00%, 11/1/2003 750 731
(1) Security Capital U.S. Realty
2.00%, 5/22/2003 4,055 3,082
-----------
5,687
-----------
HEALTH CARE (13.8%)
Assisted Living Concepts, Inc.
6.00%, 11/1/2002 2,540 2,105
Athena Neurosciences Inc.
4.75%, 11/15/2004 1,745 2,120
Aviron
5.75%, 4/1/2005 1,525 1,330
Centocor, Inc.
4.75%, 2/15/2005 1,720 1,776
(1) Chiron Corp.
1.90%, 11/17/2000 930 899
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------
<S> <C> <C>
Concentra Managed Care, Inc.
4.50%, 3/15/2003 $ 755 $ 578
ESC Medical Systems Ltd.
6.00%, 9/1/2002 455 329
Genzyme Corp.
5.25%, 6/1/2005 1,140 1,428
Integrated Health Services, Inc.
5.75%, 1/1/2001 1,420 1,264
NCS HealthCare, Inc.
5.75%, 8/15/2004 2,135 1,788
Omnicare, Inc.
5.00%, 12/1/2007 3,820 3,753
Renal Treatment Centers, Inc.
5.625%, 7/15/2006 1,135 1,294
(1) Roche Holdings, Inc.
0.00%, 5/6/2012 4,675 2,472
(1) Total Renal Care Holdings, Inc.
7.00%, 5/15/2007 2,470 2,550
-----------
23,686
-----------
INTEGRATED OILS (1.5%) Pennzoil Co.
4.95%, 8/15/2008 2,605 2,605
-----------
OTHER ENERGY (1.9%)
Pride International, Inc.
6.25%, 2/15/2006 1,015 893
0.00%, 4/24/2018 2,735 691
SEACOR Holdings, Inc.
5.375%, 11/15/2006 1,785 1,722
-----------
3,306
-----------
MATERIALS & PROCESSING (0.2%)
Hexcel Corp.
7.00%, 8/1/2003 325 284
-----------
PRODUCER DURABLES (6.5%)
(1) Aspect Telecommunications Corp.
0.00%, 8/10/2018 13,850 3,445
(1) Thermo Fibertek Inc.
4.50%, 7/15/2004 285 236
WMX Technologies Inc.
2.00%, 1/24/2005 4,345 4,041
Xerox Corp.
0.57%, 4/21/2018 5,760 3,413
Xerox Credit Corp.
2.875%, 7/1/2002 140 167
-----------
11,302
-----------
TECHNOLOGY (17.6%)
Amkor Technology, Inc.
5.75%, 5/1/2003 2,360 1,699
Analog Devices, Inc.
3.50%, 12/1/2000 1,792 2,007
(1) Atmel Corp.
0.00%, 4/15/2018 5,925 1,622
BEA Systems Inc.
4.00%, 6/15/2005 2,640 1,779
Comverse Tech, Inc.
4.50%, 7/1/2005 4,725 5,174
Data General Corp.
6.00%, 5/15/2004 1,890 1,829
Gilat Satellite Networks Ltd.
6.50%, 6/3/2004 2,005 2,627
Level One Communications, Inc.
4.00%, 9/1/2004 630 822
Metamor Worldwide, Inc.
2.94%, 8/15/2004 4,930 3,744
Network Associates Inc.
0.00%, 2/13/2018 10,055 5,027
Wind River Systems, Inc.
5.00%, 8/1/2002 580 668
Xilink Inc.
5.25%, 11/1/2002 3,005 3,403
-----------
30,401
-----------
UTILITIES (3.2%)
AES Corp.
4.50%, 8/15/2005 2,820 2,926
(1) Bell Atlantic Financial Services
4.25%, 9/15/2005 2,575 2,643
-----------
5,569
-----------
OTHER (1.4%)
Triarc Cos., Inc.
0.00%, 2/9/2018 11,220 2,356
-----------
- ----------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(COST $127,410) 126,244
- ----------------------------------------------------------------
<CAPTION>
SHARES
- ----------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (25.0%)
- ----------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (4.3%)
Coltec Capital Trust 5.25% Cvt. Pfd. 36,800 1,628
Fleetwood Capital Trust 6.00% Cvt. Pfd. 35,000 1,610
- - Union Pacific Capital Trust 6.25%
Cvt. Pfd. 88,000 4,202
-----------
7,440
-----------
CONSUMER DISCRETIONARY (2.8%)
Kmart Financing 7.75% Cvt. Pfd. 59,000 3,463
Metromedia International
Group, Inc. 7.25% Cvt. Pfd. 38,100 962
Tribune Co. 6.25% Cvt. Pfd. 14,800 413
-----------
4,838
-----------
CONSUMER STAPLES (2.1%)
Suiza Capital Trust II 5.50% Cvt. Pfd. 86,700 3,576
-----------
FINANCIAL SERVICES (3.8%)
CNB Capital Trust 6.00% Cvt. Pfd. 80,700 2,141
Conseco Finance Trust 7.00% Cvt. Pfd. 61,600 2,553
Crescent Real Estate, Inc. REIT
6.75% Cvt. Pfd. 57,100 1,006
Innkeepers USA Trust 8.625%
Cvt. Pfd. 38,200 764
-----------
6,464
-----------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
MARKET
VALUE*
CONVERTIBLE SECURITIES FUND SHARES (000)
- ----------------------------------------------------------------
<S> <C> <C>
MATERIALS & PROCESSING (2.4%)
- - Monsanto Co. 6.50% Cvt. Pfd. 44,500 $ 2,014
Sealed Air Corp. $2.00 Cvt. Pfd. 43,800 2,064
-----------
4,078
-----------
PRODUCER DURABLES (0.8%)
Kaufman & Broad Home Corp.
8.25% Cvt. Pfd. 169,200 1,459
-----------
TECHNOLOGY (4.3%)
Cellnet Data Systems 7.00%
Cvt. Pfd. 50,700 754
(1) Lernout & Hauspie Speech
Products NV 4.75% Cvt. Pfd. 54,200 1,985
Loral Space & Communications
Ltd. 6.00% Cvt. Pfd. 47,000 2,603
Unisys Corp. $3.75 Cvt. Pfd. 38,500 2,031
-----------
7,373
-----------
UTILITIES (4.3%)
IXC Communications, Inc.
6.75% Cvt. Pfd. 36,700 1,089
Intermedia Communications, Inc.
7.00% Cvt. Pfd. 58,100 1,154
- - KN Energy Inc.
8.25% Cvt. Pfd. 46,900 2,028
Winstar Communications, Inc.
7.00% Cvt. Pfd. 84,300 3,203
-----------
7,474
-----------
OTHER (0.2%)
Coltec Capital Trust 5.25% Cvt. Pfd. 5,900 261
-----------
- ----------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $47,760) 42,963
- ----------------------------------------------------------------
COMMON STOCK
- ----------------------------------------------------------------
Intermedia Communications Inc.
(COST $24) 1,073 18
- ----------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.9%)
- ----------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.27%, 12/1/1998 $ 245 245
5.29%, 12/1/1998--Note F 6,479 6,479
- ----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $6,724) 6,724
- ----------------------------------------------------------------
TOTAL INVESTMENTS (102.2%)
(COST $181,918) 175,949
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.2%)
- ----------------------------------------------------------------
Other Assets--Note C 4,421
Security Lending Collateral
Payable to Brokers--Note F (6,479)
Other Liabilities (1,761)
-----------
(3,819)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 15,509,304 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $172,130
================================================================
NET ASSET VALUE PER SHARE $11.10
================================================================
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security. New issue that has not paid a
dividend as of November 30, 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 November 30, 1998, the
aggregate value of these securities was $18,934,000,
representing 11.0% of net assets.
REIT--Real Estate Investment Trust.
- ----------------------------------------------------------------
AT NOVEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------
Paid in Capital $177,397 $11.44
Undistributed Net
Investment Income 2,109 .14
Accumulated Net
Realized Losses--Note D (1,407) (.09)
Unrealized Depreciation--
Note E (5,969) (.39)
- ----------------------------------------------------------------
NET ASSETS $172,130 $11.10
================================================================
</TABLE>
16
<PAGE> 19
STATEMENTS OF OPERATION
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
YEAR ENDED NOVEMBER 30, 1998
(000)
- ----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 2,763
Interest 6,678
Security Lending 64
----------
Total Income 9,505
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 770
Performance Adjustment (3)
The Vanguard Group--Note C
Management and Administrative 484
Marketing and Distribution 45
Taxes (other than income taxes) 9
Custodian Fees 21
Auditing Fees 8
Shareholders' Reports 24
Annual Meeting and Proxy Costs 1
----------
Total Expenses 1,359
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,146
- ----------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (1,376)
- ----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (10,995)
- ----------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (4,225)
==============================================================================================
</TABLE>
17
<PAGE> 20
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
YEAR ENDED NOVEMBER 30,
-------------------------------
1998 1997
(000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS OPERATIONS
Net Investment Income $ 8,146 $ 7,520
Realized Net Gain (Loss) (1,376) 16,197
Change in Unrealized Appreciation (Depreciation) (10,995) 169
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (4,225) 23,886
-------------------------------
DISTRIBUTIONS
Net Investment Income (8,273) (6,451)
Realized Capital Gain (16,111) (16,736)
-------------------------------
Total Distributions (24,384) (23,187)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 40,843 43,991
Issued in Lieu of Cash Distributions 21,712 20,712
Redeemed (50,920) (46,022)
-------------------------------
Net Increase from Capital Share Transactions 11,635 18,681
- ---------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (16,974) 19,380
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 189,104 169,724
-------------------------------
End of Year $172,130 $189,104
=========================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,441 3,549
Issued in Lieu of Cash Distributions 1,873 1,761
Redeemed (4,337) (3,766)
-------------------------------
Net Increase in Shares Outstanding 977 1,544
=========================================================================================================
</TABLE>
18
<PAGE> 21
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.01 $13.07 $12.03 $10.94 $12.89
-------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .52 .53 .43 .52 .53
Net Realized and Unrealized Gain (Loss) on Investments (.77) 1.17 1.29 1.26 (1.04)
-------------------------------------------------------------
Total from Investment Operations (.25) 1.70 1.72 1.78 (.51)
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.54) (.47) (.54) (.51) (.53)
Distributions from Realized Capital Gains (1.12) (1.29) (.14) (.18) (.91)
-------------------------------------------------------------
Total Distributions (1.66) (1.76) (.68) (.69) (1.44)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.10 $13.01 $13.07 $12.03 $10.94
==========================================================================================================================
TOTAL RETURN -2.16% 14.81% 14.88% 17.10% -4.35%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $172 $189 $170 $172 $175
Ratio of Total Expenses to Average Net Assets 0.73% 0.67% 0.69% 0.75% 0.73%
Ratio of Net Investment Income to Average Net Assets 4.36% 4.29% 3.43% 4.63% 4.68%
Portfolio Turnover Rate 186% 182% 97% 46% 52%
==========================================================================================================================
</TABLE>
19
<PAGE> 22
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 Trustees 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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
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 year
ended November 30, 1998, the advisory fee represented an effective annual rate
of 0.41% of the fund's average net assets before a decrease of $3,000 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 Trustees. The fund has
commited to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At November 30, 1998, the fund had contributed capital of $28,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.1% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
20
<PAGE> 23
D. During the year ended November 30, 1998, the fund purchased $335,412,000 of
investment securities and sold $337,700,000 of investment securities, other than
temporary cash investments. At November 30, 1998, the fund had available a
capital loss carryforward of $1,465,000 to offset future net capital gains
through November 30, 2006.
E. At November 30, 1998, net unrealized depreciation of investment securities
for financial reporting and federal income tax purposes was $5,969,000,
consisting of unrealized gains of $9,030,000 on securities that had risen in
value since their purchase and $14,999,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at November 30,
1998, was $6,191,000, for which the fund held cash collateral of $6,479,000.
Cash collateral received is invested in repurchase agreements.
21
<PAGE> 24
REPORT OF INDEPENDENT
ACCOUNTANTS
[PHOTO]
To the Shareholders and
Trustees of Vanguard Convertible Securities Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Convertible Securities Fund (the "Fund") at November 30, 1998, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 6, 1999
22
<PAGE> 25
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD CONVERTIBLE SECURITIES
FUND
This information for the fiscal year ended November 30, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $974,000 as capital gain dividends (from net long-term
capital gains) to shareholders in December 1997. Of the $974,000 capital gains
dividends, the funds designates $512,000 as a 20% rate gain distribution.
For corporate shareholders, 27.3% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
23
<PAGE> 26
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
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.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, 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.,
NACCO Industries, and Newfield Exploration Co.
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.
THOMAS J. HIGGINS
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> 27
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
first balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[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.
Q820-01/25/1999
(C) 1999 Vanguard Marketing Corporation, Distributor.
All rights reserved.
