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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT 33-4424 UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 21
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
VANGUARD CONVERTIBLE SECURITIES FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON MARCH 17, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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VANGUARD(R)
CONVERTIBLE
SECURITIES FUND
Prospectus
March 17, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
November 30, 1999
[A MEMBER OF
THE VANGUARD GROUP LOGO]
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VANGUARD CONVERTIBLE SECURITIES FUND
Prospectus
March 17, 2000
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CONTENTS
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1 FUND PROFILE 13 FINANCIAL HIGHLIGHTS
4 ADDITIONAL INFORMATION 15 INVESTING WITH VANGUARD
4 A WORD ABOUT RISK 15 SERVICES AND ACCOUNT FEATURES
4 WHO SHOULD INVEST 15 TYPES OF ACCOUNTS
5 PRIMARY INVESTMENT STRATEGIES 17 BUYING SHARES
9 THE FUND AND VANGUARD 19 REDEEMING SHARES
10 INVESTMENT ADVISER 22 TRANSFERRING REGISTRATION
10 DIVIDENDS, CAPITAL GAINS, AND TAXES 23 FUND AND ACCOUNT UPDATES
12 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Convertible Securities Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard Convertible Securities
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of capital.
INVESTMENT STRATEGIES
The Fund invests mainly in convertible securities, which are hybrid securities
that combine the investment characteristics of bonds and common stocks.
Convertible securities include corporate bonds and preferred stocks that are
convertible into common stock, as well as debt securities with warrants
attached. Convertible securities tend to have credit ratings that are below
investment-grade.
PRIMARY RISKS
THE FUND IS SUBJECT TO SEVERAL RISKS, ANY OF WHICH COULD CAUSE INVESTORS TO LOSE
MONEY. These include:
- - Interest rate risk, which is the chance that prices of convertible
securities will decline over short or even long periods due to rising
interest rates. The market value of a convertible security is particularly
sensitive to changes in interest rates when the convertible security's
predetermined conversion price is much higher than the price of the issuing
company's common stock.
- - Stock market risk, which is the chance that prices of convertible
securities will decline over short or even long periods due to a general
decline in the stock market. The market value of a convertible security is
particularly sensitive to changes in the price of the issuer's common stock
when the convertible security's predetermined conversion price is about the
same as the price of the issuing company's common stock.
- - Credit risk, which is the chance that an issuer will fail to pay interest
or dividends on a convertible security in a timely manner. Companies that
issue convertible securities are usually small-to-medium size, and they
often lack top ratings for creditworthiness or credit quality. In addition,
the credit rating of a company's convertible securities is generally lower
than the rating of its conventional debt securities, since convertible
securities are normally considered "junior" securities--that is, the
company usually must pay interest on its conventional debt before it can
make payments on its convertible securities.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index and a competitive funds index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
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2
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ANNUAL TOTAL RETURNS
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1990 -8.18%
1991 34.34%
1992 19.00%
1993 13.54%
1994 -5.68%
1995 16.74%
1996 15.44%
1997 16.39%
1998 0.56%
1999 30.36%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.65% (quarter ended December 31, 1999) and the lowest return for a
quarter was -16.01% (quarter ended September 30, 1990).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Convertible Securities Fund 30.36% 15.51% 12.45%
CS First Boston Convertible Securities 42.28 20.08 14.84
Index
Average Convertible Securities Fund* 31.14 17.42 12.98
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*Derived from data provided by Lipper Inc.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.50%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.55%
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3
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Convertible Securities Fund's expense ratio in fiscal year
1999 was 0.55%, or $5.50 per $1,000 of average net assets. The average
convertible securities mutual fund in 1999 had expenses of 1.53%, or $15.30 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a Fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
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The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$56 $176 $307 $689
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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4
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are distributed
in December NEWSPAPER ABBREVIATION
Convrt
INVESTMENT ADVISER
Oaktree Capital Management LLC, Los VANGUARD FUND NUMBER
Angeles, Calif., since 1996 082
INCEPTION DATE CUSIP NUMBER
June 17, 1986 922023106
NET ASSETS AS OF NOVEMBER 30, 1999 TICKER SYMBOL
$180 million VCVSX
SUITABLE FOR IRAS
Yes
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Convertible Securities Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking higher current income than is normally available from
common stocks and greater potential for long-term growth of capital than is
normally available from corporate bonds.
- - You wish to add a convertible securities fund to your existing holdings,
which could include other stock, bond, money market, and tax-exempt
investments.
- - You are willing to tolerate sharp, sometimes sudden fluctuations in the
value of your investment. In the past, price fluctuations for convertible
securities have been wider than those for bonds but not as wide as those
for stocks.
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5
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income along with long-term growth of capital.
It also explains how the adviser implements these strategies.The Fund's Board of
Trustees oversees the management of the Fund, and may change the investment
strategies in the interest of shareholders.
In addition, this section discusses several important risks--interest rate
risk, stock market risk, credit risk, and manager risk--faced by investors in
the Fund.
MARKET EXPOSURE
Under normal circumstances, the Fund will invest at least 80% of its assets in
convertible securities. These securities include corporate bonds and preferred
stocks that are convertible into common stock, as well as debt securities with
warrants (which permit their owners to buy a specific number of stock shares at
a predetermined price) or common stock attached.
The remaining 20% of the Fund's assets may be invested in non-convertible
corporate or U.S. government debt securities, common stocks, or money market
instruments.
[FLAG] BECAUSE CONVERTIBLE SECURITIES PERFORM LIKE BONDS UNDER CERTAIN
CONDITIONS, THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE
THAT THE MARKET VALUE OF THE FUND'S SHARES WILL DECLINE OVER SHORT OR EVEN
LONG PERIODS DUE TO RISING INTEREST RATES.
<PAGE>
6
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PLAIN TALK ABOUT
CONVERTIBLE SECURITIES
Convertible securities are "hybrid" securities--that is, they have some
characteristics of bonds and some of common stocks. Like a bond (or some
preferred stocks), a convertible security typically pays a fixed rate of
interest (or dividends) and promises to repay principal at a given date in the
future. However, an investor can exchange the convertible security for a
specific number of shares of the issuing company's common stock, at a
"conversion price" specified at the time the convertible security is issued.
Accordingly, the value of the convertible security increases (or decreases) as
the price of the underlying common stock increases (or decreases). Convertible
securities typically pay income yields that are higher than the dividend yield
of the issuer's common stock, but lower than the yield of the issuer's debt
securities.
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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--you would have to lower
your asking price. On the other hand, if interest rates were falling and 4%
bonds were being offered, you should be able to sell your 5% bond for more than
you paid.
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When a convertible security's predetermined conversion price is much higher
than the price of the issuing company's common stock, the convertible security
takes on the characteristics of a bond. At such times, the price of the security
will move in the opposite direction of interest rates.
In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assumes a 7% yield
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<PAGE>
7
These figures are intended to illustrate interest rate risk; you should not
regard them as an indication of future returns from the bond market as a whole
or the Fund in particular.
[FLAG] BECAUSE PRICES OF THE FUND'S CONVERTIBLE HOLDINGS MAY FLUCTUATE IN
RESPONSE TO PRICE CHANGES IN THE UNDERLYING COMMON STOCKS, THE FUND IS
SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL
WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN
CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
When a convertible security's predetermined conversion price is about the
same as the price of the issuing company's common stock, the convertible
security tends to behave like a common stock. In such a case, the security's
price may exhibit the volatility that is characteristic of common stocks.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
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U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
SECURITY SELECTION
Oaktree Capital Management, LLC (Oaktree), adviser to the Fund, generally
selects convertible securities that offer attractive yields and were issued by
companies with above-average growth potential. In general, each security
selected for the Fund will, in Oaktree's opinion, be priced at a reasonable
premium relative to the price at which it can be converted into common stock.
Oaktree typically will sell a security when the security approaches its
conversion price, or if a security is no longer as attractive as an alternate
investment.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
Companies that issue convertible securities often do not have high credit
ratings. In addition, the credit rating of a company's convertible securities is
typically lower than the rating
<PAGE>
8
of the company's conventional debt securities, since convertible securities are
normally considered "junior" securities--that is, the company usually must pay
interest on its conventional debt before it can make payments on its convertible
securities.
The Fund invests primarily in convertible securities that are rated B, Ba,
or Baa by Moody's Investors Service or B, BB, or BBB by Standard and Poor's
Corporation. Reflecting the universe of convertible securities, most of the
Fund's rated holdings are below investment-grade. The Fund may also invest in
nonrated securities that, in the opinion of the adviser, are equivalent in
quality to rated securities eligible for purchase by the Fund. Therefore, credit
risk is greater for the Fund than for funds that invest in higher-grade bonds.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISER MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. The Fund's
average turnover rate for the past five years has been about 135%. (A turnover
rate of 100% occurs, for example, when a Fund sells and replaces securities
valued at 100% of its net assets within a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of November 30, 1999, the average turnover rate for all
convertible securities funds was approximately 113%, according to Morningstar,
Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in convertible securities, the Fund may make certain other
kinds of investments to achieve its objective.
The Fund may invest up to 20% of its assets in foreign securities that are
denominated in U.S. dollars. These securities may be traded in U.S. or foreign
markets. To the extent that it owns dollar-denominated foreign stocks, the Fund
is subject to country risk, which is the possibility that political events (such
as a war), financial problems (such as government default or currency
devaluation), or natural disasters (such as an earthquake) will weaken a
country's economy and cause securities issued by companies in that country to
lose value.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
<PAGE>
9
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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<PAGE>
10
INVESTMENT ADVISER
The Fund employs Oaktree Capital Management, LLC, 333 South Grand Avenue, 28th
Floor, Los Angeles, CA, 90071 as its investment adviser. Oaktree manages the
Fund subject to the control of the Trustees and officers of the Fund.
Oaktree's advisory fee is paid quarterly. This fee is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter.
For the fiscal year ended November 30, 1999, the fee paid to Oaktree
represented an effective annual rate of 0.41% of the Fund's average net assets
before a decrease of 0.22% based on performance.
In addition, Oaktree's advisory fee is increased or decreased, based on the
cumulative investment performance of the Fund as compared to the cumulative
total return of the Credit Suisse (CS) First Boston Convertible Securities
Index. Under this fee arrangement, Oaktree's fee can be increased or decreased
by as much as 50%.
The Fund has authorized Oaktree to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, Oaktree may
choose brokers who charge higher commissions. If more than one broker can obtain
the best available price and most favorable execution of a transaction, then
Oaktree is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to Oaktree or the Fund. Also, the
Fund may direct Oaktree to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser-- either as
a replacement for an existing adviser or as an additional adviser. Any
significant change in the Fund's advisory arrangements will be communicated to
shareholders in writing. In addition, as the Fund's sponsor and overall manager,
The Vanguard Group may provide investment advisory services to the Fund, on an
at-cost basis, at any time.
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PLAIN TALK ABOUT
THE FUND'S ADVISER
Oaktree Capital Management, LLC, is an investment advisory firm founded in 1995.
Oaktree focuses on certain specialized investment areas, including convertible
securities. As of November 30, 1999, Oaktree managed more than $15 billion in
assets.
The manager responsible for overseeing the implementation of Oaktree's strategy
for Vanguard Convertible Securities Fund is:
LARRY W. KEELE, Principal and a Founder of Oaktree; has worked in investment
management since 1981; has managed portfolio investments since 1983; B.A.,
Tennessee Tech University; M.B.A., University of South Carolina.
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<PAGE>
11
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. You can receive distributions of income dividends or capital gains in
cash, or you can have them automatically reinvested in more shares of the Fund.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
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BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
<PAGE>
12
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: On December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is CONVRT.
<PAGE>
13
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $11.10 $13.01 $13.07 $12.03 $10.94
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .52 .52 .53 .43 .52
Net Realized and
Unrealized Gain (Loss)
on Investments 2.13 (.77) 1.17 1.29 1.26
--------------------------------------------------------
Total from Investment
Operations 2.65 (.25) 1.70 1.72 1.78
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.57) (.54) (.47) (.54) (.51)
Distributions from
Realized Capital
Gains -- (1.12) (1.29) (.14) (.18)
--------------------------------------------------------
Total Distributions (.57) (1.66) (1.76) (.68) (.69)
- --------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR $13.18 $11.10 $13.01 $13.07 $12.03
================================================================================
TOTAL RETURN 24.85% -2.16% 14.81% 14.88% 17.10%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $180 $172 $189 $170 $172
Ratio of Total
Expenses to Average
Net Assets 0.55% 0.73% 0.67% 0.69% 0.75%
Ratio of Net
Investment Income to
Average Net Assets 4.30% 4.36% 4.29% 3.43% 4.63%
Turnover Rate 162% 186% 182% 97% 46%
================================================================================
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $11.10 per share.
During the year, the Fund earned $0.52 per share from investment income
(interest and dividends) and $2.13 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.57 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.65 per share) minus the distributions ($0.57 per share)
resulted in a share price of $13.18 at the end of the year. This was an increase
of $2.08 per share (from $11.10 at the beginning of the year to $13.18 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 24.85% for the year.
As of November 30, 1999, the Fund had $180 million in net assets. For the year,
its expense ratio was 0.55% ($5.50 per $1,000 of net assets); and its net
investment income amounted to 4.30% of its average net assets. It sold and
replaced securities valued at 162% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
15
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
16
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
17
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-82
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
18
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Convertible Securities Fund-82
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
19
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 21.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
20
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
21
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or members firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
<PAGE>
22
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
<PAGE>
23
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in January and July for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
CONVERTIBLE SECURITIES
Hybrid securities, combining the investment characteristics of both bonds and
common stocks. Like a bond (or preferred stock), a convertible security pays a
fixed income rate (dividend), but may be converted into common stock at a
specific price or conversion rate.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and interests in other investment
vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Convertible Securities
Fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-4627
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P082N-03/17/2000
<PAGE>
VANGUARD(R)
CONVERTIBLE
SECURITIES FUND
Participant Prospectus
March 17, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
November 30, 1999
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD CONVERTIBLE SECURITIES FUND
Participant Prospectus
March 17, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 10 DIVIDENDS, CAPITAL GAINS, AND TAXES
4 ADDITIONAL INFORMATION 11 SHARE PRICE
4 A WORD ABOUT RISK 12 FINANCIAL HIGHLIGHTS
4 WHO SHOULD INVEST 14 INVESTING WITH VANGUARD
5 PRIMARY INVESTMENT STRATEGIES 15 ACCESSING FUND INFORMATION BY
COMPUTER
9 THE FUND AND VANGUARD
GLOSSARY (inside back cover)
10 INVESTMENT ADVISER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Convertible Securities Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND PROFILE
The following profile summarizes key features of Vanguard Convertible Securities
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of capital.
INVESTMENT STRATEGIES
The Fund invests mainly in convertible securities, which are hybrid securities
that combine the investment characteristics of bonds and common stocks.
Convertible securities include corporate bonds and preferred stocks that are
convertible into common stock, as well as debt securities with warrants
attached. Convertible securities tend to have credit ratings that are below
investment-grade.
PRIMARY RISKS
THE FUND IS SUBJECT TO SEVERAL RISKS, ANY OF WHICH COULD CAUSE INVESTORS TO LOSE
MONEY. These include:
- - Interest rate risk, which is the chance that prices of convertible
securities will decline over short or even long periods due to rising
interest rates. The market value of a convertible security is particularly
sensitive to changes in interest rates when the convertible security's
predetermined conversion price is much higher than the price of the issuing
company's common stock.
- - Stock market risk, which is the chance that prices of convertible
securities will decline over short or even long periods due to a general
decline in the stock market. The market value of a convertible security is
particularly sensitive to changes in the price of the issuer's common stock
when the convertible security's predetermined conversion price is about the
same as the price of the issuing company's common stock.
- - Credit risk, which is the chance that an issuer will fail to pay interest
or dividends on a convertible security in a timely manner. Companies that
issue convertible securities are usually small-to-medium size, and they
often lack top ratings for creditworthiness or credit quality. In addition,
the credit rating of a company's convertible securities is generally lower
than the rating of its conventional debt securities, since convertible
securities are normally considered "junior" securities--that is, the
company usually must pay interest on its conventional debt before it can
make payments on its convertible securities.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index and a competitive funds index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -8.18%
1991 34.34%
1992 19.00%
1993 13.54%
1994 -5.68%
1995 16.74%
1996 15.44%
1997 16.39%
1998 0.56%
1999 30.36%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.65% (quarter ended December 31, 1999) and the lowest return for a
quarter was -16.01% (quarter ended September 30, 1990).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Convertible Securities Fund 30.36% 15.51% 12.45%
CS First Boston Convertible Securities 42.28 20.08 14.84
Index
Average Convertible Securities Fund* 31.14 17.42 12.98
--------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.50%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.55%
<PAGE>
3
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Convertible Securities Fund's expense ratio in fiscal year
1999 was 0.55%, or $5.50 per $1,000 of average net assets. The average
convertible securities mutual fund in 1999 had expenses of 1.53%, or $15.30 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a Fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
- --------------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$56 $176 $307 $689
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
<PAGE>
4
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, Convrt
June, September, and December; capital gains,
if any, are distributed in December VANGUARD FUND NUMBER
082
INVESTMENT ADVISER
Oaktree Capital Management LLC, Los Angeles, CUSIP NUMBER
Calif., since 1996 922023106
INCEPTION DATE TICKER SYMBOL
June 17, 1986 VCVSX
NET ASSETS AS OF NOVEMBER 30, 1999
$180 million
- --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Convertible Securities Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking higher current income than is normally available from
common stocks and greater potential for long-term growth of capital than is
normally available from corporate bonds.
- - You wish to add a convertible securities fund to your existing holdings,
which could include other stock, bond, money market, and tax-exempt
investments.
- - You are willing to tolerate sharp, sometimes sudden fluctuations in the
value of your investment. In the past, price fluctuations for convertible
securities have been wider than those for bonds but not as wide as those
for stocks.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
<PAGE>
5
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income along with long-term growth of capital.
It also explains how the adviser implements these strategies.The Fund's Board of
Trustees oversees the management of the Fund, and may change the investment
strategies in the interest of shareholders.
In addition, this section discusses several important risks--interest rate
risk, stock market risk, credit risk, and manager risk--faced by investors in
the Fund.
MARKET EXPOSURE
Under normal circumstances, the Fund will invest at least 80% of its assets in
convertible securities. These securities include corporate bonds and preferred
stocks that are convertible into common stock, as well as debt securities with
warrants (which permit their owners to buy a specific number of stock shares at
a predetermined price) or common stock attached.
The remaining 20% of the Fund's assets may be invested in non-convertible
corporate or U.S. government debt securities, common stocks, or money market
instruments.
[FLAG] BECAUSE CONVERTIBLE SECURITIES PERFORM LIKE BONDS UNDER CERTAIN
CONDITIONS, THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE
THAT THE MARKET VALUE OF THE FUND'S SHARES WILL DECLINE OVER SHORT OR EVEN
LONG PERIODS DUE TO RISING INTEREST RATES.
<PAGE>
6
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CONVERTIBLE SECURITIES
Convertible securities are "hybrid" securities--that is, they have some
characteristics of bonds and some of common stocks. Like a bond (or some
preferred stocks), a convertible security typically pays a fixed rate of
interest (or dividends) and promises to repay principal at a given date in the
future. However, an investor can exchange the convertible security for a
specific number of shares of the issuing company's common stock, at a
"conversion price" specified at the time the convertible security is issued.
Accordingly, the value of the convertible security increases (or decreases) as
the price of the underlying common stock increases (or decreases). Convertible
securities typically pay income yields that are higher than the dividend yield
of the issuer's common stock, but lower than the yield of the issuer's debt
securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--you would have to lower
your asking price. On the other hand, if interest rates were falling and 4%
bonds were being offered, you should be able to sell your 5% bond for more than
you paid.
- --------------------------------------------------------------------------------
When a convertible security's predetermined conversion price is much higher
than the price of the issuing company's common stock, the convertible security
takes on the characteristics of a bond. At such times, the price of the security
will move in the opposite direction of interest rates.
In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
- --------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- --------------------------------------------------------------------------------
*Assumes a 7% yield
- -------------------------------------------------------------------------------
<PAGE>
7
These figures are intended to illustrate interest rate risk; you should not
regard them as an indication of future returns from the bond market as a whole
or the Fund in particular.
[FLAG] BECAUSE PRICES OF THE FUND'S CONVERTIBLE HOLDINGS MAY FLUCTUATE IN
RESPONSE TO PRICE CHANGES IN THE UNDERLYING COMMON STOCKS, THE FUND IS
SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL
WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN
CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
When a convertible security's predetermined conversion price is about the
same as the price of the issuing company's common stock, the convertible
security tends to behave like a common stock. In such a case, the security's
price may exhibit the volatility that is characteristic of common stocks.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
- ------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- ------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
SECURITY SELECTION
Oaktree Capital Management, LLC (Oaktree), adviser to the Fund, generally
selects convertible securities that offer attractive yields and were issued by
companies with above-average growth potential. In general, each security
selected for the Fund will, in Oaktree's opinion, be priced at a reasonable
premium relative to the price at which it can be converted into common stock.
Oaktree typically will sell a security when the security approaches its
conversion price, or if a security is no longer as attractive as an alternate
investment.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
Companies that issue convertible securities often do not have high credit
ratings. In addition, the credit rating of a company's convertible securities is
typically lower than the rating
<PAGE>
8
of the company's conventional debt securities, since convertible securities are
normally considered "junior" securities--that is, the company usually must pay
interest on its conventional debt before it can make payments on its convertible
securities.
The Fund invests primarily in convertible securities that are rated B, Ba,
or Baa by Moody's Investors Service or B, BB, or BBB by Standard and Poor's
Corporation. Reflecting the universe of convertible securities, most of the
Fund's rated holdings are below investment-grade. The Fund may also invest in
nonrated securities that, in the opinion of the adviser, are equivalent in
quality to rated securities eligible for purchase by the Fund. Therefore, credit
risk is greater for the Fund than for funds that invest in higher-grade bonds.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISER MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. The Fund's
average turnover rate for the past five years has been about 135%. (A turnover
rate of 100% occurs, for example, when a Fund sells and replaces securities
valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of November 30, 1999, the average turnover rate for all
convertible securities funds was approximately 113%, according to Morningstar,
Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in convertible securities, the Fund may make certain other
kinds of investments to achieve its objective.
The Fund may invest up to 20% of its assets in foreign securities that are
denominated in U.S. dollars. These securities may be traded in U.S. or foreign
markets. To the extent that it owns dollar-denominated foreign stocks, the Fund
is subject to country risk, which is the possibility that political events (such
as a war), financial problems (such as government default or currency
devaluation), or natural disasters (such as an earthquake) will weaken a
country's economy and cause securities issued by companies in that country to
lose value.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
<PAGE>
9
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
10
INVESTMENT ADVISER
The Fund employs Oaktree Capital Management, LLC, 333 South Grand Avenue, 28th
Floor, Los Angeles, CA, 90071 as its investment adviser. Oaktree manages the
Fund subject to the control of the Trustees and officers of the Fund.
Oaktree's advisory fee is paid quarterly. This fee is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter.
For the fiscal year ended November 30, 1999, the fee paid to Oaktree
represented an effective annual rate of 0.41% of the Fund's average net assets
before a decrease of 0.22% based on performance.
In addition, Oaktree's advisory fee is increased or decreased, based on the
cumulative investment performance of the Fund as compared to the cumulative
total return of the Credit Suisse (CS) First Boston Convertible Securities
Index. Under this fee arrangement, Oaktree's fee can be increased or decreased
by as much as 50%.
The Fund has authorized Oaktree to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, Oaktree may
choose brokers who charge higher commissions. If more than one broker can obtain
the best available price and most favorable execution of a transaction, then
Oaktree is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to Oaktree or the Fund. Also, the
Fund may direct Oaktree to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as
a replacement for an existing adviser or as an additional adviser. Any
significant change in the Fund's advisory arrangements will be communicated to
shareholders in writing. In addition, as the Fund's sponsor and overall manager,
The Vanguard Group may provide investment advisory services to the Fund, on an
at-cost basis, at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
Oaktree Capital Management, LLC, is an investment advisory firm founded in 1995.
Oaktree focuses on certain specialized investment areas, including convertible
securities. As of November 30, 1999, Oaktree managed more than $15 billion in
assets.
The manager responsible for overseeing the implementation of Oaktree's strategy
for Vanguard Convertible Securities Fund is:
LARRY W. KEELE, Principal and a Founder of Oaktree; has worked in investment
management since 1981; has managed portfolio investments since 1983; B.A.,
Tennessee Tech University; M.B.A., University of South Carolina.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income
<PAGE>
11
dividends generally are distributed in March, June, September, and December;
capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is CONVRT.
<PAGE>
12
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $11.10 $13.01 $13.07 $12.03 $10.94
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .52 .52 .53 .43 .52
Net Realized and
Unrealized Gain (Loss)
on Investments 2.13 (.77) 1.17 1.29 1.26
--------------------------------------------------------
Total from Investment
Operations 2.65 (.25) 1.70 1.72 1.78
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.57) (.54) (.47) (.54) (.51)
Distributions from
Realized Capital
Gains -- (1.12) (1.29) (.14) (.18)
--------------------------------------------------------
Total Distributions (.57) (1.66) (1.76) (.68) (.69)
- --------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR $13.18 $11.10 $13.01 $13.07 $12.03
================================================================================
TOTAL RETURN 24.85% -2.16% 14.81% 14.88% 17.10%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $180 $172 $189 $170 $172
Ratio of Total
Expenses to Average
Net Assets 0.55% 0.73% 0.67% 0.69% 0.75%
Ratio of Net
Investment Income to
Average Net Assets 4.30% 4.36% 4.29% 3.43% 4.63%
Turnover Rate 162% 186% 182% 97% 46%
================================================================================
<PAGE>
13
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $11.10 per share.
During the year, the Fund earned $0.52 per share from investment income
(interest and dividends) and $2.13 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.57 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.65 per share) minus the distributions ($0.57 per share)
resulted in a share price of $13.18 at the end of the year. This was an increase
of $2.08 per share (from $11.10 at the beginning of the year to $13.18 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 24.85% for the year.
As of November 30, 1999, the Fund had $180 million in net assets. For the year,
its expense ratio was 0.55% ($5.50 per $1,000 of net assets); and its net
investment income amounted to 4.30% of its average net assets. It sold and
replaced securities valued at 162% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
14
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
15
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
CONVERTIBLE SECURITIES
Hybrid securities, combining the investment characteristics of both bonds and
common stocks. Like a bond (or preferred stock), a convertible security pays a
fixed income rate (dividend), but may be converted into common stock at a
specific price or conversion rate.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and interests in other investment
vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Convertible Securities
Fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-4627
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I082N-03/17/2000
<PAGE>
PART B
VANGUARD CONVERTIBLE SECURITIES FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
MARCH 17, 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated March 17, 2000). To obtain, without charge, the
Prospectus or the most recent Annual Report to Shareholders, which contains the
Fund's financial statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE FUND......................................................B-1
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-3
PURCHASE OF SHARES...........................................................B-4
REDEMPTION OF SHARES.........................................................B-4
MANAGEMENT OF THE FUND.......................................................B-5
INVESTMENT ADVISORY SERVICES.................................................B-8
PORTFOLIO TRANSACTIONS......................................................B-10
INVESTMENT POLICIES.........................................................B-11
FINANCIAL STATEMENTS........................................................B-16
YIELD AND TOTAL RETURN......................................................B-16
SHARE PRICE.................................................................B-18
COMPARATIVE INDEXES.........................................................B-19
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS.............................B-22
DESCRIPTION OF THE FUND
ORGANIZATION
The Fund was organized as a Maryland corporation in 1986, and was reorganized as
a Delaware business trust in June 1998. The Fund is registered with the United
States Securities and Exchange Commission (the Commission) under the Investment
Company Act of 1940 (the 1940 Act) as an open-end diversified management
investment company. There is no limit on the number of full and fractional
shares that the Fund may issue.
SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, serves as the Fund's custodian. The custodian
is responsible for maintaining the Fund's assets and keeping all necessary
accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
B-1
<PAGE>
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Fund's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
its assets. Unless terminated by reorganization or liquidation, the Fund will
continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The Fund's shareholders are entitled to receive any
dividends or other distributions declared by the Fund. No shares have priority
or preference over any other shares with respect to dividends or distributions
of the Fund. All dividends and distributions will be paid ratably to all Fund
shareholders according to the number of Fund shares held by shareholders on the
record date.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Fund shareholders receive one vote for each dollar of net
asset value owned on the record date, and a fractional vote for each fractional
dollar of net asset value owned on the record date. Voting rights are
non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. If the Fund is liquidated, each shareholder will be
entitled to receive, based on the number of shares held, a pro rata share of the
Fund's assets that remain after satisfaction of all liabilities. Shareholders
may receive cash, securities, or a combination of the two.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If the Fund fails to meet these requirements
in any taxable year, it will be subject to tax on its taxable income at
corporate rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.
B-2
<PAGE>
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of the Fund's
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments if its outstanding
borrowings exceed 5% of net assets.
COMMODITIES AND OPTIONS. The Fund may not invest in commodities, except
that it may invest in stock futures contracts, options, and options on futures
contracts. No more than 5% of the Fund's total assets may be used as initial
margin deposit for futures contracts, and no more than 20% of the Fund's total
assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government or its
agencies or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except (i) by purchasing
bonds or other debt securities or by entering into repurchase agreements; (ii)
by lending its portfolio securities; and (iii) to another Vanguard fund through
Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
B-3
<PAGE>
None of these limitations prevents the Fund from participating in The
Vanguard Group, Inc. (Vanguard). As a member of the Group, the Fund may own
securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See "Management of the Fund"
for more information.
Compliance with the investment limitations set forth above is measured at
the time securities are purchased. If a percentage restriction is adhered to at
the time the investment is made, a later change in percentage resulting from a
change in the market value of assets will not constitute a violation of such
restriction.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offering
of its shares; (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund; and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments for certain fiduciary accounts (such as employee benefit plans) or
under circumstances where certain economies can be achieved in sales of the
Fund's shares.
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business
day will be sent to Vanguard that day and your share price will be based on
the Fund's net asset value calculated at the close of trading that day.
Orders received by Schwab after 3 p.m. Eastern time will be sent to
Vanguard on the following business day and your share price will be based
on the Fund's net asset value calculated at the close of trading that day.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares (i) during any period that the New York Stock Exchange (the
Exchange) is closed or trading on the Exchange is restricted, as determined by
the Commission; (ii) during any period when an emergency exists, as defined by
the Commission, as a result of which it is not reasonably practicable for the
Fund to dispose of securities owned by it or fairly determine the value of its
assets; and (iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.
B-4
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN (DOB: 7/29/1954), Chairman, Chief Executive Officer, and
Trustee* Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (DOB: 1/25/1950), Trustee Vice President, Chief
Information Officer, and member of the Executive Committee of Johnson and
Johnson (Pharmaceuticals/Consumer Products), Director of Johnson & Johnson*MERCK
Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's
Research and Education Institute.
BRUCE K. MACLAURY (DOB: 5/7/1931), Trustee President Emeritus of The Brookings
Institution (Independent Non-Partisan Research Organization); Director of
American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and
Financial Services), and National Steel Corp.
BURTON G. MALKIEL (DOB: 8/28/1932), Trustee Chemical Bank Chairman's Professor
of Economics, Princeton University; Director of Prudential Insurance Co. of
America, Banco Bilbao Gestinova, Baker Fentress & Co. (Investment Management),
The Jeffrey Co. (Holding Company), and Select Sector SPDR Trust (Exchange-Traded
Mutual Fund).
ALFRED M. RANKIN, JR. (DOB: 10/8/1941), Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (Machinery/Coal/
Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL (DOB: 6/12/1936), Trustee President and Chief Executive Officer
of The Nature Conservancy (Non-Profit Conservation Group); Director of Pacific
Gas and Electric Co., Procter & Gamble Co., and NACCO Industries, Inc.
(Machinery/Coal/Appliances), and Newfield Exploration Co. (Energy); formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University.
JAMES O. WELCH, JR. (DOB: 5/13/1931), Trustee Retired Chairman of Nabisco
Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco
(Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (DOB: 3/2/1936), Trustee Retired Chairman of Rohm & Haas Co.
(Chemicals); Director of Cummins Engine Co. (Diesel Engine Company), and The
Mead Corp. (Paper Products); and AmeriSource Health Corp.; and Trustee of
Vanderbilt University.
RAYMOND J. KLAPINSKY (DOB: 12/7/1938), Secretary* Managing Director of The
Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
THOMAS J. HIGGINS (DOB: 5/21/1957), Treasurer* Principal of The Vanguard Group,
Inc.; Treasurer of each of the investment companies in The Vanguard Group.
B-5
<PAGE>
ROBERT D. SNOWDEN (DOB: 9/4/1961), Controller* Principal of The Vanguard Group,
Inc.; Controller of each of the investment companies in The Vanguard Group.
* Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Vanguard Convertible Securities Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc., the Fund, and the other funds in the Group obtain at cost virtually
all of their corporate management, administrative, and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
several of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's total expenses, which are allocated among
the funds under methods approved by the Board of Trustees of each fund. In
addition, each fund bears its own direct expenses such as legal, auditing, and
custodian fees. In order to generate additional revenues and thereby reduce the
funds' expenses, Vanguard also provides certain administrative services to other
organizations.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested in Vanguard are adjusted from
time to time in order to maintain the proportionate relationship between each
fund's relative net assets and its contribution to Vanguard's capital. The
Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard fund may be called upon to invest up to 0.40% of its current assets in
Vanguard; and (b) there is no other limitation on the dollar amount each
Vanguard fund may contribute to Vanguard's capitalization. At November 30, 1999,
the Convertible Securities Fund had contributed capital of $35,000 to Vanguard,
representing 0.02% of the Fund's net assets and 0.04% of Vanguard's
capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials, and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of Vanguard. The Trustees and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each fund, and whether to
organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon relative net assets. The remaining
one-half of those expenses is allocated among the funds based upon each fund's
sales for the preceding 24 months relative to the total sales of all the funds
as a Group; provided, however, that no fund's aggregate quarterly rate of
B-6
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contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for Vanguard, and
that no fund shall incur annual distribution expenses in excess of 0.02 of 1% of
its average month-end net assets.
During the fiscal years ended November 30, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution, and marketing expenses: $468,000,
$529,000, and $535,000, respectively.
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to several Vanguard funds. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the funds utilizing
these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-8), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the Fund--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
B-7
<PAGE>
VANGUARD CONVERTIBLE SECURITIES FUND
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
FROM THIS AS PART OF THESE BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUND(1) FUND'S EXPENSES(1) RETIREMENT TRUSTEES(2)
- --------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
Barbara Barnes
Hauptfuhrer(3) $3 $1 $15,000 $0
JoAnn Heffernan Heisen $36 $2 $15,000 $80,000
Bruce K. MacLaury $37 $4 $12,000 $75,000
Burton G. Malkiel $37 $3 $15,000 $80,000
Alfred M. Rankin, Jr. $36 $2 $15,000 $80,000
John C. Sawhill $36 $3 $15,000 $80,000
James O. Welch, Jr. $36 $3 $15,000 $80,000
J. Lawrence Wilson $36 $2 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
November 30, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle and Mrs. Hauptfuhrer have retired from the funds' Board,
effective December 31, 1999 and December 31, 1998, respectively.
INVESTMENT ADVISORY SERVICES
The Fund has entered into an investment advisory agreement with Oaktree Capital
Management, LLC (Oaktree) under which Oaktree manages the investment and
reinvestment of the assets of the Fund and continuously reviews, supervises, and
administers the Fund's investment program. Oaktree discharges its
responsibilities subject to the control of the Fund's officers and Trustees.
Under the agreement, the Fund pays Oaktree an advisory fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the Fund's average month-end net assets
for the quarter (the Basic Fee):
NET ASSETS ANNUAL RATE
- ---------- -----------
First $100 million .................... 0.425%
Next $100 million ..................... 0.400%
Next $100 million ..................... 0.375%
Next $100 million ..................... 0.350%
Assets in excess of $400 million ...... 0.325%
Beginning November 30, 1997, the Basic Fee payment to Oaktree may be
increased or decreased by a Performance Fee Adjustment (the Adjustment). The
Adjustment is a percentage of the Basic Fee and changes proportionately with the
investment performance of the Fund relative to the investment performance of the
First Boston Convertible Securities Index (the Index). The following table sets
forth the Adjustment of the Basic Fee payable by the Fund to Oaktree under the
investment advisory agreement.
B-8
<PAGE>
The Adjustment will be calculated as follows, using data from the table
below:
PERFORMANCE FEE
ADJUSTMENT AS A
CUMULATIVE PERFORMANCE OF THE FUND PERCENTAGE OF
VS. THE INDEX FOR THE RELEVANT PERIOD BASIC FEE
- ------------------------------------- ---------------
- -100% of Performance Factor or more ... -50%
- -1% to -99% of Performance Factor ..... 0 to -50%
- -0- ................................... 0
+1% to +99% of Performance Factor ..... 0 to +50%
+100% of Performance Factor or more ... +50%
To calculate the Adjustment for a given quarter, (1) for the Relevant
Period for that quarter as set forth in the following table (the Relevant
Period), the difference between the investment performance of the Fund and the
investment performance of the Index (the Performance Differential) will be
calculated; (2) the Performance Differential will be compared to the Performance
Factor specified by the table for that period to determine the extent to which
an Adjustment is in order; and (3) the Adjustment will be the appropriate
percentage of the Basic Fee* for an average quarter in that Relevant Period
determined from the table above.
*For purposes of this calculation, the relevant Basic Fee is calculated by
applying the quarterly rate against average assets over the relevant period for
which performance is measured.
PERFORMANCE
QUARTER ENDING RELEVANT PERIOD FACTOR (B.P.)
- -------------- --------------- -------------
Before 11/30/1997 --no adjustment-- --no adjustment--
11/30/1997 12/1/1996-11/30/1997 67
2/28/1998 12/1/1996-2/28/1998 83
5/31/1998 12/1/1996-5/31/1998 100
8/31/1998 12/1/1996-8/31/1998 117
11/30/1998 12/1/1996-11/30/1998 133
2/28/1999 12/1/1996-2/28/1999 150
5/31/1999 12/1/1996-5/31/1999 167
8/31/1999 12/1/1996-8/31/1999 183
11/30/1999 12/1/1996-11/30/1999 200
After 11/30/1999 prior 36 months 200
The investment performance of the Fund for any given period, expressed as a
percentage of its net asset value per share at the beginning of such period,
shall be the sum of: (i) the change in the Fund's net asset value per share
during such period; (ii) the value of the cash distributions per share
accumulated to the end of such period; and (iii) the value of capital gains
taxes per share paid or payable by the Fund on undistributed realized long-term
capital gains accumulated to the end of such period. For this purpose, the value
of distributions per share of realized capital gains, of dividends per share
paid from investment income, and of capital gains taxes per share paid or
payable on undistributed realized long-term capital gains, shall be treated as
reinvested in shares of the Fund at the net asset value per share in effect at
the close of business on the record date for the payment of such distributions
and dividends and the date on which provision is made for such taxes, after
giving effect to such distributions, dividends, and taxes.
The investment record of the Index for the period, expressed as a
percentage of the Index level at the beginning of the period, shall be the sum
of (i) the change in the level of the Index during the period and (ii) the
value, computed consistently with the Index, of cash distributions having an
ex-dividend date occurring within the period made by companies whose securities
comprise the Index.
B-9
<PAGE>
During the fiscal years ended November 30, 1997, 1998, and 1999, the Fund
incurred the following investment advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee ................................. $731,000 $770,000 $695,000
Increase or Decrease for Performance
Adjustment ................................ (91,000) (3,000) (369,000)
--------- --------- ---------
Total $640,000 $767,000 $326,000
The investment advisory agreement has a term of one year. To be renewed for
an additional one-year term, the agreement must be specifically approved by a
vote of the Fund's Board of Trustees, including the affirmative votes of a
majority of the Trustees who are not parties to the agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The agreement is
automatically terminated if assigned, and may be terminated without penalty at
any time (1) by vote of the Board of Trustees of the Fund on 60 days' written
notice to Oaktree, or (2) by Oaktree upon 60 days' written notice to the Fund.
DESCRIPTION OF OAKTREE
Oaktree Capital Management, LLC specializes in selected niche investment
markets. The founders of Oaktree formed the company in April 1995 after having
managed convertible securities, distressed debt, and high yield bond accounts
for Trust Company of the West (TCW) since 1985.
Larry W. Keele, Principal and one of the five founders of Oaktree, serves
as the Fund's manager. Mr. Keele is supported by research and other investment
services provided by the professional staff of Oaktree. As of November 30, 1999,
Oaktree managed approximately $15 billion.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes Oaktree (with the approval of the
Fund's Board of Trustees) to select the brokers or dealers that will execute the
purchases and sales of portfolio securities for the Fund and directs Oaktree to
use its best efforts to obtain the best available price and most favorable
execution as to all transactions for the Fund. Oaktree has undertaken to execute
each investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, Oaktree will use its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain the best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
adviser. Oaktree considers such information useful in the performance of its
obligations under the agreement, but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Trustees, the adviser may cause the Fund to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Fund.
Currently, it is the Fund's policy that Oaktree may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. Oaktree will only pay such higher
B-10
<PAGE>
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the adviser and/or the Fund. However,
Oaktree has informed the Fund that it generally will not pay higher commission
rates specifically for the purpose of obtaining research services.
During the fiscal years ended November 30, 1997, 1998, and 1999 the Fund
paid $41,776, $72,951, and $51,858 in brokerage commissions, respectively.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the adviser. If purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these other clients serviced by the adviser are considered at or about the
same time, transactions in such securities will be allocated among the Fund and
such other clients in a manner deemed equitable by the adviser. Although there
may be no specified formula for allocating such transactions, the allocation
methods used and the results of such allocations will be subject to periodic
review by the Fund's Board of Trustees.
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth in
the Prospectus.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into stock futures
contracts, options, and options on futures contracts for the following reasons:
to maintain cash reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the underlying equity
security or index. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government Agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold", "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less that 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities
B-11
<PAGE>
otherwise held for investment purposes or expected to be acquired by them.
Speculators are less inclined to own the securities underlying the futures
contracts which they trade, and use futures contracts with the expectation of
realizing profits from fluctuations in the market value of the underlying
securities. The Fund intends to use futures contracts only for bona fide hedging
purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed"; that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of a Fund's income to fluctuations in the
market value of the underlying securities, the use of futures contracts may be a
more effective means of hedging this exposure. While the Fund will incur
commission expenses in both opening and closing out futures positions, these
costs are lower than transaction costs incurred in the purchase and sale of
portfolio securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.
Risks Factors in Futures Transactions. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge. The Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the investment
adviser does not believe that the Fund is subject to the risks of loss
frequently associated with futures transactions. The Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
B-12
<PAGE>
Utilization of futures transactions by the Fund involves the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and experience
a decline in the value of its portfolio securities. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts. The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In these cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Gains and losses on certain other
futures contracts (primarily non-U.S. futures contracts) are not recognized
until the contracts are closed and are treated as long-term or short-term
depending on the holding period of the contract. Sales of futures contracts
which are intended to hedge against a change in the value of securities held by
the Fund may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The Fund may be
required to defer the recognition of losses on futures contracts to the extent
of any unrecognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies. It is
anticipated that any net gain recognized on futures contracts will be considered
qualifying income for purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the payments.
FOREIGN INVESTMENTS. The Fund may invest up to 20% of its assets in
securities of foreign companies. The Fund anticipates that all or virtually all
of the foreign securities it owns will be U.S. dollar denominated. Investors
should recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.
Currency Risk. Because the foreign securities owned by the Fund will be
overwhelmingly U.S. dollar denominated, there will be little or no currency risk
in the typical sense--i.e., the value of the Fund's foreign securities will not
fluctuate directly in response to changes in currency exchange rates. However,
if the currency of an issuer's country decreases against the dollar, it could
lead to a decrease in the value of the issuer's common stock in dollar terms.
That, in turn, could negatively affect the value of a dollar-denominated
security that is convertible into the issuer's common stock.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and
B-13
<PAGE>
more volatile than securities of comparable domestic companies. There is
generally less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the U.S. In addition, with respect to
certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the value of securities issued by companies in
those countries.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stock) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
investments and foreign currency contracts the Fund may make or enter into will
be subject to the special currency rules described above.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in illiquid securities. Illiquid securities are securities that may
not be sold or disposed of in the ordinary course of business within seven
business days at approximately the value at which they are being carried on the
Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they may
be considered illiquid securities--meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Fund's investment adviser determines the liquidity of restricted
securities on a daily basis, the Board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the Board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information about the security's issuer.
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REPURCHASE AGREEMENTS. The Fund, either alone or together with other
members of the Vanguard Group, may invest in repurchase agreements with
commercial banks, brokers, or dealers, either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a
fixed-income security (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance, or a certificate of deposit) from a
commercial bank, broker, or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Fund's Board of Trustees monitors repurchase agreement
transactions generally and has established guidelines and standards for a review
by the investment adviser of the creditworthiness of any bank, broker, or dealer
that is a counterparty to a repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the adviser
acknowledges these risks, it is expected that they can be controlled through
careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks, or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules and Regulations
or interpretations of the Commission thereunder. These provisions limit the
amount of securities the Fund may lend to 33/1//3% of the Fund's total assets,
and require that (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, an irrevocable letter of credit or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund's investing any cash collateral
in interest bearing short-term investments), any distribution on the loaned
securities, and any increase in their market value. Loan arrangements made by
the Fund will comply with all other applicable regulatory requirements,
including the rules of the Exchange, which presently require the borrower, after
notice, to redeliver the securities within the normal settlement time of three
business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer, or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Fund's Board of Trustees.
At present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights
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<PAGE>
pass with the loaned securities, but if a material event occurs that affects the
loaned securities, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political, or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed-income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposit; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1999, including
the financial highlights for each of the five fiscal years in the period ended
November 30, 1999, appearing in the Fund's 1999 Annual Report to Shareholders,
and the report thereon of PricewaterhouseCoopers LLP independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. For a more complete discussion of the performance,
please see the Fund's Annual Report to Shareholders, which may be obtained
without charge.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended November 30, 1999 was 3.16%.
The Fund's average annual total return for the one-, five-, and ten-year
periods ended November 30, 1999 was 24.85%, 13.54%, and 11.54%, respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)/1/N/ -1
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<PAGE>
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of the
applicable period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
P (1+T)/N/ = ATV
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-, 5-, or 10-year periods of a
hypothetical $1,000 payment made at the beginning of the time period,
assuming no liquidation of the investment at the end of the measurement
periods
Instructions.
1.Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the period.
Adjustments may be made for subsequent re-characterizations of distributions.
2.Calculate the taxes due on distributions by the Fund by applying the highest
federal marginal tax rates to each component of the distributions on the
reinvestment date (e.g., ordinary income, short-term capital gain, long-term
capital gain, etc.). For periods after December 31, 1997, the federal marginal
tax rates used for the calculations are 39.6% for ordinary income and
short-term capital gains and 20% for long-term capital gains. Note that the
applicable tax rates may vary over the measurement period. Assume no taxes are
due on the portions of any distributions classified as exempt interest or
non-taxable (i.e., return of capital). Ignore any potential tax liabilities
other than federal tax liabilities (e.g., state and local taxes).
3.Include all recurring fees that are charged to all shareholder accounts. For
any account fees that vary with the size of the account, assume an account
size equal to the Fund's mean (or median) account size. Assume that no
additional taxes or tax credits result from any redemption of shares required
to pay such fees.
4.State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
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<PAGE>
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of the
applicable period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)/6/-1]
Where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during the period that were
entitled to receive dividends
d =the maximum offering price per share on the last day of the period
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the Fund's total assets, less all liabilities, by the total number of
shares outstanding. The net asset value is determined as of the close of the
Exchange, generally 4:00 p.m. Eastern time, on each day that the Exchange is
open for trading.
Portfolio securities for which market quotations are readily available
(including those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. If such a security is not traded on a
valuation date, it will be valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Funds.
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<PAGE>
COMPARATIVE INDEXES
Each of the investment company members of Vanguard, including Vanguard
Convertible Securities Fund, may, from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard
& Poor's 500 Composite Stock Price Index with the lowest price-to-book ratios,
comprising 50% of the market capitalization of the S&P 500.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $25 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current-coupon high grade
general-obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high grade, noncallable preferred stock issues.
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NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated Baa- or better. The Index has a market
value of approximately $5 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between
one and five years. The index has a market value of approximately $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities of ten or more years. The index
has a market value of over $1.1 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) INVESTMENT GRADE DEBT INDEX--is a market
weighted index that contains all investment grade corporate debt securities with
maturities of one to five years. The index has a market value of approximately
$175 billion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) U.S. TREASURY INDEX-- is a market
weighted index that contains all U.S. Treasury securities with maturities of one
to five years. The index has a market value of approximately $1.1 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) U.S. GOVERNMENT INDEX--is a market
weighted index that contains all U.S. Government agency and Treasury securities
with maturities of one to five years. The index has a market value of
approximately $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) U.S. TREASURY INDEX--is a market
weighted index that contains all U.S. Treasury securities with maturities of
five to ten years. The index has a market value of approximately $800 billion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) INVESTMENT GRADE DEBT INDEX--is
a market weighted index that contains all investment grade debt securities with
maturities of five to ten years. The index has a market value of approximately
$225 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or in practice limits its investments
to companies on the basis of the size of the company. From time to time,
Vanguard's advertisements may refer to the average performance and/or the
average expense ratio of the small company growth funds. (This fund category was
first established in 1982. For years prior to 1982, the results of the Lipper
Small Company Growth category were estimated using the returns of the Funds that
constituted the group at its inception).
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LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded stocks in the U.S.
RUSSELL 2000 STOCK INDEX--consists of the smallest 2,000 stocks within the
Russell 3000; a widely used benchmark for small capitalization common stocks.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
FIRST BOSTON CONVERTIBLE SECURITIES INDEX--Established as a performance
benchmark in 1982, the Index is valued monthly and generally includes 250 to 300
issues of convertible securities rated B- or better by Standard & Poor's, and a
predominant proportion of the market capitalization of the total value of all
convertible securities.
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<PAGE>
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS
Excerpts from Moody's Investors Service, Inc. (Moody's) description of its bond
ratings:
AAA--Judged to be the best quality. They carry the smallest degree of
investment risk.
AA--Judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds.
A--Possess many favorable investment attributes and are to be considered as
"upper medium grade obligations".
BAA--Considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time.
BA--Judged to have speculative elements; their future cannot be considered as
well assured.
B--Generally lack characteristics of the desirable investment;
CAA--are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
CA--Speculative in a high degree; often in default.
C--Lowest rated class of bonds; regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation description of its four highest bond
ratings:
AAA--Highest grade obligations. Capacity to pay interest and repay principal
is extremely strong.
AA--Also qualify as high grade obligations. A very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
A--Regarded as upper medium grade. They have a strong capacity to pay interest
and repay principal although they are somewhat susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. This group is the lowest which qualifies for
commercial bank investment.
BB, B, CCC, CC--Predominately speculative with respect to capacity to pay
interest and repay principal in accordance with terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
SAI082-03/17/2000
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PART C
VANGUARD CONVERTIBLE SECURITIES FUND
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Not applicable
(d) Investment Advisory Contract**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Fund" in the
Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
- --------------------
* Filed herewith
** Previously filed
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Oaktree Capital Management, LLC. (Oaktree), is an investment adviser registered
under the Investment Advisers Act of 1940, as amended (the Adviser Act). The
list required by this Item 26 of officers and partners of Oaktree, together with
any information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and partners during the past two
years, is incorporated herein by reference from Schedules B and D of Form ADV
filed by Oaktree pursuant to the Advisers Act (SEC File No. 801-48923).
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ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodian, First Union National Bank, PA4943, 530 Walnut
Street, Philadelphia, Pennsylvania 19109.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 25th day of February, 2000.
VANGUARD CONVERTIBLE SECURITIES FUND
BY:__________________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief February 25, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee February 25, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee February 25, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee February 25, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee February 25, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee February 25, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee February 25, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee February 25, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal February 25, 2000
--------------------------- Financial Officer and
(Heidi Stam) Principal Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
EXHIBIT INDEX
Consent of Independent Accountants .....................................Ex-99.BJ
Exhibit-99.BJ
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 21 to the registration statement on Form N-1A (the Registration
Statement) of our report dated January 6, 2000, relating to the financial
statements and financial highlights appearing in the 1999 Annual Report to
Shareholders of Vanguard Convertible Securities Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers--Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 24, 2000
