[SHIP LOGO]
[A MEMBER OF THE VANGUARD GROUP (R) LOGO]
Vanguard(R) Convertible Securities Fund
Annual Report
November 30, 1999
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[PHOTO]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and
that has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past 25
years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of one
man," Vanguard today is far greater than any individual. The Vanguard crew has
splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to focus
whatever intellectual power and ethical strength I possess on my mission to
assure that mutual fund investors everywhere receive a fair shake. In the spirit
of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to go
before I sleep.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/S/JCB
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CONTENTS
REPORT FROM THE CHAIRMAN ............1 PERFORMANCE SUMMARY ..................9
AFTER-TAX RETURNS REPORT ............4 FUND PROFILE ........................10
THE MARKETS IN PERSPECTIVE ..........5 FINANCIAL STATEMENTS ................13
REPORT FROM THE ADVISER .............7 REPORT OF INDEPENDENT ACCOUNTANTS ...21
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[PHOTO]
JOHN J. BRENNAN
REPORT FROM THE CHAIRMAN
Vanguard Convertible Securities Fund posted a terrific gain of 24.8% during the
fiscal year ended November 30, 1999, rebounding from a -2.2% decline in the
prior year. Bond prices fell--reflecting rising interest rates--while stocks
continued to bound higher.
The table at right presents the fund's total return (capital change plus
reinvested dividends) compared with those of the average convertible securities
fund and our unmanaged benchmark, the Credit Suisse First Boston Convertible
Securities Index. We also present the returns of two indexes as proxies for the
broad market environment: for stocks, the Wilshire 5000 Total Market Index; for
bonds, the Lehman Brothers Aggregate Bond Index. As shown in the table, our
fund's return topped that of its average peer but lagged the unmanaged
convertibles index.
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TOTAL RETURNS
FISCAL YEAR ENDED
NOVEMBER 30, 1999
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Vanguard Convertible Securities Fund 24.8%
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Average Convertible Securities Fund* 23.9%
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CS First Boston Convertibles Index 30.6%
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Wilshire 5000 Total Market Index 22.4%
Lehman Aggregate Bond Index 0.0
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*Derived from data provided by Lipper Inc.
Our total return is based on an increase in net asset value from $11.10 per
share on November 30, 1998, to $13.18 per share on November 30, 1999, and is
adjusted for dividends totaling $0.57 per share paid from net investment income.
The fund's dividend yield was 3.16% on November 30, down about 1 percentage
point from the end of fiscal 1998.
FINANCIAL MARKETS IN REVIEW
The 12-month period ended November 30 featured plenty of positive economic news,
as well as plenty of concern over how much longer the good times can roll before
inflation begins to accelerate. The U.S. economy's expansion continued to
display remarkable staying power--inflation-adjusted economic output rose 4.3%
from the third quarter of 1998 to the third quarter of 1999, and the nation's
unemployment rate was at the lowest point in three decades. Overseas economies
also picked up steam. Despite heightened business activity and a significant
rise in energy prices, inflation was moderate: Consumer prices increased 2.6%
during our fiscal year.
Of course, financial markets seek to look ahead, not behind. And a belief
that higher inflation could not be far off was reflected in a steady rise in
interest rates during the fiscal year. The yield of the 30-year U.S. Treasury
bond ended the fiscal year at 6.29%, up 123 basis points from its starting point
of 5.06% on November 30, 1998. The Federal Reserve Board aided the uptrend by
raising its target for short-term interest rates three times by a total of 75
basis points (0.75 percentage point) in an attempt to slow the economy and head
off inflation.
Despite rising interest rates, stock market averages managed an impressive
advance, albeit an uneven one. The entire U.S. stock market, as represented by
the Wilshire 5000 Index, advanced 22.4%, but much of the gain was concentrated
in a small number of stocks. Technology companies powered the ascent--tech
stocks within the S&P 500 Index gained 66% as a group. The return of the overall
S&P 500, which is dominated by
1
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large-capitalization stocks, exceeded 20% for the fifth consecutive fiscal year.
Many value-oriented stocks were left far behind, however. The S&P's value stocks
gained 12.5%, less than half the 28.5% return for growth stocks. The disparity
was astonishing within the small-cap Russell 2000 Index, where growth stocks
gained 32.7% and value stocks declined -1.4%.
Amid rising interest rates--which force bond prices lower--the bond market
suffered its worst year since 1994. Price declines were most severe among bonds
with long-term maturities. For instance, the price of long-term Treasury bonds
fell by more than 13%. The acute sensitivity of long-term bonds to interest rate
shifts reflects the fact that investors in such securities receive their cash
flow over many years. Higher interest rates reduce the "present value" of
far-off dividend or principal payments. This phenomenon was strikingly displayed
during the fiscal year: The Lehman Aggregate Bond Index, a benchmark of the
overall market for taxable investment-grade bonds, had a total return of zero,
with its interest income of 6.2% entirely offset by a price decline of -6.2%.
On balance, convertible bonds and preferred stocks--hybrid securities that
exhibit characteristics of both equities and bonds--advanced impressively during
the period, earning returns that were slightly higher than those of large-cap
stocks and far in excess of returns on bonds.
FISCAL 1999 PERFORMANCE OVERVIEW
Vanguard Convertible Securities Fund enjoyed an excellent fiscal 1999, gaining
24.8%. However, the road to this result was a bit bumpy. After sharp advances
early in the fiscal year, the convertibles market cooled in February and March.
This pattern then repeated itself; a spring rally was followed by a summertime
slump. The good times resumed in the period's final two months, and the fund
returned 10.9% from the end of September through November. Our full-year return
was 0.9 percentage point higher than the 23.9% earned by the average convertible
securities fund, but 5.8 percentage points lower than the 30.6% gain of the CS
First Boston Convertibles Index.
Our margin over our average peer--though modest--was notable, because we
held no stocks during the period. The average convertible securities fund
invested about 10% of its assets in stocks. Though Vanguard Convertible
Securities Fund periodically retains a common stock produced by the conversion
of a corporate bond or preferred stock, our adviser generally manages risk by
shunning stocks and selling convertibles once they begin to trade like pure
equities. The convertible corporate bonds and preferred stocks emphasized by our
fund are true hybrid securities--they provide more income than stocks and offer
greater potential for price appreciation than bonds.
Our shortfall versus the CS First Boston Convertibles Index can be
explained by the benchmark's concentration in a few issues that soared during
the fiscal year. For example, the index's top holding--a technology issue whose
price increased roughly tenfold during the period--made up 6.1% of the index on
November 30. The largest holding in your fund represented half that weighting,
just 3.2% of the fund's net assets at year-end. More information on the amazing
runup in a few convertibles can be found on page 7 in the letter from the fund's
adviser, Oaktree Capital Management, LLC, which has managed the fund's
investments for the past three years.
LONG-TERM PERFORMANCE OVERVIEW
The table on the next page presents the returns during the past decade for the
Convertible Securities Fund, our average peer, and the unmanaged CS First Boston
Convertibles Index.
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It also shows the value of hypothetical $10,000 investments made ten years ago
in the fund and its benchmarks. Assuming the reinvestment of income and capital
gains distributions, a $10,000 investment in the Convertible Securities Fund
would have grown to $29,799, or $1,181 less than the $30,980 that would have
accumulated in the average convertible fund. Our return trailed that of the
index by a wider margin, 1.7 percentage points annually.
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TOTAL RETURNS
TEN YEARS ENDED NOVEMBER 30, 1999
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Vanguard Convertible Securities Fund 11.5% $29,799
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Average Convertible Securities Fund 12.0% $30,980
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CS First Boston Convertibles Index 13.2% $34,658
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Our fund is disciplined in its pursuit of issues that offer attractive
yields and above-average growth potential. As always, our adviser's efforts are
aided by our low expense ratio (annual expenses as a percentage of net assets).
In fiscal 1999, our expense ratio was 0.55%, more than 0.9 percentage point
below the 1.48% expense ratio of the average convertible securities fund. In
practice, our advantage means that competing funds must earn a higher
return--perhaps by taking greater risks--to offset their cost disadvantage.
IN SUMMARY
When one asset class performs so well, as stocks did again in fiscal 1999, and
another performs poorly, as did bonds, it would be easy to conclude that
diversification is not worthwhile. That conclusion would be dead wrong.
At Vanguard, we continue to believe that most investors should hold
balanced portfolios of stock funds, bond funds, and short-term reserves. For
some investors, convertible securities also can play a worthwhile role. All of
these securities should be held in proportions suitable for each person's unique
investment goals, time horizon, and tolerance for risk. With such a plan in
place, investors are well advised to "stay the course."
/S/
John J. Brennan
Chairman and Chief Executive Officer
December 30, 1999
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A NOTE OF THANKS TO OUR FOUNDER
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As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
3
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Convertible Securities Fund's after-tax performance. The figures on this
page demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Convertible
Securities Fund in a tax-deferred account such as an individual retirement
account or a 401(k), this information does not apply to you. Such accounts are
not subject to current taxes.
The table below presents the pretax and after-tax returns for your fund and
an appropriate peer group of mutual funds. Two things to keep in mind:
o The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
o The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in
this report, returns for comparable mutual funds are derived from data provided
by Lipper Inc., which differ somewhat.)
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<CAPTION>
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED NOVEMBER 30, 1999
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1 YEAR 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C> <C> <C>
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
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Vanguard Convertible
Securities Fund 24.8% 22.4% 13.5% 9.9% 11.5% 8.5%
Average Convertibles Fund* 22.4 19.7 15.3 12.2 12.5 9.7
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*Based on data from Morningstar, Inc.
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As you can see, the Convertible Securities Fund's pretax total return of
24.8% for the 12 months ended November 30, 1999, was reduced by taxes to 22.4%.
In other words, for investors in the highest tax bracket, the fund's pretax
return was cut by 2.4 percentage points. In comparison, the 22.4% return of the
average convertible securities fund was reduced by taxes to 19.7%, a difference
of 2.7 percentage points. Over longer time periods, the fund delivered lower
returns than its average peer, both before and after taxes.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to understand that our calculation does not reflect
the effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
4
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THE MARKETS IN PERSPECTIVE
YEAR ENDED NOVEMBER 30, 1999
Strong economic expansion sent global stock markets charging higher but dealt a
blow to bond prices during the fiscal year ended November 30, 1999. The
powerhouse U.S. economy led the global growth parade, joined by Asian, European,
and Latin American economies that had slumped or stagnated in 1998.
Interest rates rose sharply as investors and monetary policymakers grew
increasingly worried that such strong economic growth would cause inflation to
surge. Although the rise in rates caused bond prices to fall, it only tempered
the stock market's advance.
U.S. STOCK MARKETS
Against the backdrop of a booming economy, U.S. companies reported solid
increases in earnings during the fiscal year. The nation's economic output
increased at an inflation-adjusted rate of 4.3%--a very rapid pace for such a
large, mature economy. Consumer spending, which accounts for roughly two-thirds
of economic activity, powered the expansion. Americans spent freely, encouraged
by rising wealth from a long bull market, a hot job market, and climbing
incomes.
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AVERAGE ANNUAL RETURNS
PERIODS ENDED NOVEMBER 30, 1999
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1 YEAR 3 YEARS 5 YEARS
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STOCKS
S&P 500 Index 20.9% 24.3% 27.5%
Russell 2000 Index 15.7 10.1 14.8
Wilshire 5000 Index 22.4 22.6 25.6
MSCI EAFE Index 21.4 12.3 11.4
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BONDS
Lehman Aggregate Bond Index 0.0% 5.6% 8.0%
Lehman 10 Year Municipal Bond Index -0.4 4.8 7.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
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OTHER
Consumer Price Index 2.6% 2.0% 2.4%
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The stock market, as measured by the Wilshire 5000 Index, gained 22.4%
overall. For a change, mid-capitalization and small-cap stocks outpaced their
large-cap brethren. The large-cap S&P 500 Index, which accounts for more than
75% of the U.S. stock market's total value, gained 20.9% during the year; the
rest of the market (as measured by the Wilshire 4500 Index) gained 29.0%.
Increasingly optimistic expectations for future corporate earnings more
than offset the negative effects of rising interest rates during fiscal 1999.
Higher rates often hurt stock prices because many investors use current rates to
discount the value of a stock's projected earnings and dividends. The higher the
interest rate, the more future earnings are discounted, and the less investors
will pay for the stock now.
Because of a remarkable surge in prices for technology stocks, growth
stocks again outperformed value stocks during the past year. Within the S&P 500
Index, growth stocks--characterized by high prices in relation to earnings, book
value, and dividends--recorded a 28.5% return, 16 percentage points above the
12.5% return for value stocks. The disparity was even greater in the small-cap
segment of the market; growth stocks within the small-cap Russell 2000 Index
gained 32.7%, while value stocks posted a -1.4% return.
Technology stocks within the S&P 500 Index gained 66%. QUALCOMM posted an
eye-popping 1,200% return, and a number of computer-related stocks doubled or
tripled in
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price, including Sun Microsystems (+257%), Apple Computer (+206%), Oracle
(+197%), Gateway (+172%), Texas Instruments (+152%), and Cisco Systems (+136%).
Big gains for wireless telecommunications and cable-TV stocks powered the
utilities category to an overall gain of nearly 28%. The producer-durables
group, which includes some technology-related manufacturers as well as aircraft
and equipment makers, gained 27%. Oil exploration and service firms in the
"other energy" category posted a 26% return, assisted by a jump in prices for
oil and natural gas.
The year's worst-performing sector was consumer staples (down nearly -12%).
This group suffered as severe price competition and a stronger dollar in Europe
crimped profits for many food and beverage makers, and the specter of litigation
costs caused tobacco stocks to slump. The auto & transportation group declined
- -2% overall, with airline stocks hurt by rising prices for jet fuel.
U.S. BOND MARKETS
Stock investors may cheer a fast-growing economy, but rapid growth tends to
worry bond investors. Early in the fiscal year, inflation seemed
dormant--plunging oil prices had taken commodity price indexes to the lowest
point in a quarter-century. But as the world economy began hitting on all
cylinders, the bond market feared that a minuscule U.S. unemployment rate,
rising commodity prices, and capacity constraints would cause inflation to
accelerate. Although oil prices were up nearly 150% during the fiscal year, the
overall price level, as measured by the Consumer Price Index, increased by a
moderate 2.6%.
The Federal Reserve Board, anticipating price pressures, abandoned its bias
toward easier monetary policy, and by mid-year was boosting interest rates to
try to throttle back the economic engines. The bond market was ahead of the
Fed--interest rates began rising sharply in February. By fiscal year-end, the
yield of 30-year U.S. Treasury bonds had risen 1.23 percentage points (123 basis
points) to 6.29%. The 10-year Treasury note's yield rose 148 basis points, from
4.71% to 6.19%. The rise in short-term rates was more restrained; 3-month
Treasury bill yields were up 82 basis points to 5.30% at fiscal year-end.
Bond prices fall when interest rates rise, and long-term bond prices are
most sensitive to changing rates. Long-term Treasury bond prices fell by more
than -13%, resulting in total returns of -8%. The Lehman Aggregate Bond Index, a
measure of the overall taxable bond market, which has an intermediate-term
structure on average, broke even on the year, as interest income of 6.2% was
offset by price declines. The damage to municipal bond prices was not as severe
as for Treasuries, and the intermediate-term Lehman 7 Year Municipal Bond Index
recorded a price decline of -3.7% and a total return of 0.5%.
INTERNATIONAL STOCK MARKETS
International markets had a strong year, with European stocks gaining 21.9% in
local-currency terms and Pacific-region stocks advancing 30.2%. However,
currency effects significantly altered the returns to U.S.-based investors. The
U.S. dollar rose in value against most European currencies but fell sharply
against the Japanese yen. As a result, returns from Europe plunged to 9.8% in
dollar terms while returns from the Pacific soared to 51.0%.
Overall, U.S. investors earned 21.4% in the major developed international
markets, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. The bull markets in most nations stemmed
from renewed optimism that economic growth would continue to accelerate. Japan
and the rest of Asia, which were hit hardest by currency and economic crises in
1997 and 1998, saw the biggest stock gains.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 37.1% in U.S.-dollar terms, as investors regained an appetite for the
considerable risks of smaller markets.
6
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REPORT FROM THE ADVISER
Our latest fiscal year ended on an ebullient note as Vanguard Convertible
Securities Fund's technology and telecommunications holdings propelled it to a
very strong finish. Fueled by strong price advances for underlying equities,
convertibles in general and the fund in particular had one of the best years
ever. Interest rates on corporate debt rose only moderately, and were not a
major impediment. For the year ended November 30, 1999, the fund's 24.8% return
handily outpaced those of the S&P 500 Index (20.9%), the Russell 2000 Index
(15.7%), and most fixed-income benchmarks.
Although the fund's return was excellent in an absolute sense, it trailed
the 30.6% return of our primary benchmark--the Credit Suisse First Boston
Convertible Securities Index. This index's extraordinary return was due to the
performance of just a few big holdings, which behaved like stocks and had
stellar gains. As we have discussed in previous letters, the fund focuses on
securities that have both equity and fixed-income characteristics, and does not
hold convertibles after they have become pure equity substitutes.
An example of a security that has become a pure equity substitute is the
QUALCOMM 5.75% convertible preferred, which sold for $50 in February 1997. It
now sells above $550 and yields just over 0.5%. From here, the convertible can
only mirror the movement of QUALCOMM's common stock. This offering of preferred,
when issued, had a market value of $660 million. Now, thanks to the phenomenal
performance of the underlying stock, its value stands at $6.7 billion. After
rising 291% during the fourth fiscal quarter and an unbelievable 1,061% during
fiscal 1999, this single issue now represents 6.1% of the Convertible Securities
Index. Because of the incredible performance of QUALCOMM and a few other stocks,
a large proportion of the index now is concentrated in a few very equity-like
securities. In fact, the top ten securities, or just 3% of the 330 issues in the
index, have a market capitalization of $20.8 billion and account for 23% of the
index's value.
En route to its impressive return for the fiscal year, the convertibles
market was volatile--due mainly to the changing macroeconomic environment, in
which generally positive corporate earnings, fluctuating oil prices, and
interest rate gyrations all affected convertible security valuation and
performance.
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INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved by investing in a broadly diversified group of
convertible securities that provide attractive combinations of current income
and potential for price appreciation from their convertibility into common
stock.
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Robust earnings and a resolutely upbeat market psychology pushed stocks
higher, which helped prices of convertibles, especially those tied to
high-flying technology and telecommunication stocks. For downside protection, we
look to each convertible's "investment value" (i.e., its value as a
nonconvertible fixed-income security). During the fiscal year, the average
convertible's investment value generally weakened because of the rise in market
interest rates. At the same time, as the price of the average convertible was
pushed higher by the gain of its underlying shares, its premium over investment
value rose sharply. What really determined any convertible portfolio's
performance during this period was, first, its exposure to the tech and telecom
sectors,
7
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and then whether it emphasized holdings sensitive to equity prices as
opposed to those whose fixed-income characteristics offered downside protection.
Rather than retain appreciating positions (at the cost of allowing our portfolio
to become more equity-sensitive), we followed our usual practice of scaling out
of rising investments. By doing this, we maintained our focus on the downside
risk of individual positions and the overall portfolio.
Another factor that influenced the convertible market in 1999 was the
strength of the new-issue market, which saw innovative structures, a diverse
list of issuers, some very large issues, and "overnight" convertible offerings.
During the year, a total of $33.6 billion in new paper was issued, compared with
$33.3 billion in 1998. Attractive new issues that we purchased during the past
few quarters included convertibles from Nextel, LSI Logic, Interpublic Group,
Cox Communications, and Safeguard Scientifics. Liquidity in the convertible
market remains good, and we remain focused on the larger issues, as measured by
market capitalization.
The fund is well diversified, with approximately 70 individual holdings
representing a wide variety of industries. At the close of the fiscal year on
November 30, our heaviest industry emphasis was on the telecommunications and
technology sectors. In terms of securities, our principal concentration remains
on convertible bonds with moderate conversion premiums and maturity dates five
to ten years out. Given the very strong gains in many of our holdings, we have
recently reduced positions in several names that have become equity-like in
their characteristics. As always, when purchasing securities we look for a good
balance of upside potential and downside protection.
Oaktree Capital Management, LLC
December 10, 1999
8
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PERFORMANCE SUMMARY
CONVERTIBLE SECURITIES FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: JUNE 17, 1986-NOVEMBER 30, 1999
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CONVERTIBLE SECURITIES FUND FIRST
BOSTON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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1986 -2.0% 1.8% -0.2% 1.6%
1987 -19.0 4.2 -14.8 -5.4
1988 11.4 7.4 18.8 16.5
1989 10.7 7.0 17.7 16.3
1990 -16.3 5.4 -10.9 -8.7
1991 21.7 7.5 29.2 24.6
1992 19.9 6.1 26.0 21.7
1993 9.5% 4.4% 13.9% 19.2%
1994 -8.5 4.1 -4.4 -3.9
1995 11.9 5.2 17.1 24.0
1996 9.9 5.0 14.9 15.3
1997 10.6 4.2 14.8 15.4
1998 -6.4 4.2 -2.2 1.4
1999 18.7 6.1 24.8 30.6
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*CS First Boston Convertibles Index.
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMACE: NOVEMBER 30, 1989-NOVEMBER 30, 1999
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[CHART]
AVERAGE CS FIRST
CONVERTIBLE CONVERTIBLE BOSTON
SECURITIES SECURITIES CONVERTIBLES
FUND FUND INDEX
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198911 10000 10000 10000
199002 9730 9759 9740
199005 10366 10271 10138
199008 9337 9611 9458
199011 8905 9065 9132
199102 10205 10255 10324
199105 11158 11067 11001
199108 11512 11465 11514
199111 11510 11348 11378
199202 13210 12543 12703
199205 13139 12744 12986
199208 13302 12897 13165
199211 14503 13446 13849
199302 14765 14000 14648
199305 15543 14925 15456
199308 15976 15636 16195
199311 16515 15616 16512
199402 16848 16087 16991
199405 15785 15548 16037
199408 16358 16051 16624
199411 15796 15268 15872
199502 16013 15661 16494
199505 16872 16864 17825
199508 18162 17908 19330
199511 18498 18201 19678
199602 18936 19119 20767
199605 20261 20188 21907
199608 20023 19940 21319
199611 21250 21091 22697
199702 21749 21736 23120
199705 22395 22836 23929
199708 24121 24502 25993
199711 24396 24543 26190
199802 26099 25938 27506
199805 26323 26732 27924
199808 22091 23287 24064
199811 23868 25012 26545
199902 24442 25935 27967
199905 26395 28125 30055
199908 27262 28701 31029
199911 29799 30980 34658
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1999
------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
==Convertible Securities Fund 24.85% 13.54% 11.54% $29,799
__Average Convertible Securities Fund* 23.86 15.20 11.97 30,980
- --CS First Boston Convertibles Index 30.56 16.91 13.23 34,658
- --------------------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Convertible Securities Fund 6/17/1986 20.81% 10.58% 4.93% 5.13% 10.06%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE>
FUND PROFILE
CONVERTIBLE SECURITIES FUND
This Profile provides a snapshot of the fund's characteristics as of November
30, 1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 11 and 12.
FINANCIAL ATTRIBUTES
- ---------------------------------------------
Number of Securities 77
Yield 3.2%
Conversion Premium 20.3%
Average Weighted Maturity 5.0 years
Average Coupon 3.8%
Average Quality Ba
Average Duration 3.6 years
Foreign Holdings 9.4%
Turnover Rate 162%
Expense Ratio 0.55%
Cash Reserves 13.7%
DISTRIBUTION BY CREDIT QUALITY
(% OF BONDS)
- ---------------------------------------------
Aaa/AAA 1.6%
Aa/AA 0.0
A/A 0.3
Baa/BBB 22.9
Ba/BB 12.1
B/B 28.4
Less than B/B 10.3
Not Rated 24.4
- ---------------------------------------------
Total 100.0%
VOLATILITY MEASURES
- ---------------------------------------------
CONVERTIBLE
SECURITIES S&P 500
- ---------------------------------------------
R-Squared 0.68 1.00
Beta 0.64 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- ---------------------------------------------
Sepracor Inc. 3.2%
Cox Communications, Inc. 3.0
Sanmina Corp. 2.9
American Tower Corp. 2.6
Lattice Semiconductor Corp. 2.4
Adaptec, Inc. 2.3
Roche Holdings, Inc. 2.1
The Interpublic Group of Cos., Inc. 2.1
SEACOR Holdings, Inc. 2.0
Global Telesystems Inc. 1.9
- ---------------------------------------------
Top Ten 24.5%
DISTRIBUTION BY MATURITY
(% OF BONDS)
- ---------------------------------------------
Under 1 Year 1.7%
1-5 Years 56.3
5-10 Years 42.0
10-20 Years 0.0
20-30 Years 0.0
Over 30 Years 0.0
- ---------------------------------------------
Total 100.0%
10
<PAGE>
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
- --------------------------------------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1999
-------------------------------------------------
CONVERTIBLE SECURITIES CONVERTIBLE SECURITIES
-------------------------------------------------
Auto & Transportation ........ 10.6% 6.6%
Consumer Discretionary ....... 19.3 15.1
Consumer Staples ............. 3.7 0.0
Financial Services ........... 7.2 3.9
Health Care .................. 14.0 10.7
Integrated Oils .............. 1.5 2.3
Other Energy ................. 2.0 9.6
Materials & Processing ....... 2.6 1.6
Producer Durables ............ 7.5 5.9
Technology ................... 22.3 30.0
Utilities .................... 7.7 13.0
Other ........................ 1.6 1.3
- --------------------------------------------------------------------------------
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers.
AVERAGE WEIGHTED MATURITY. The average length of time until securities held by a
fund reach maturity (or are called) and are repaid. In general, the longer the
average weighted maturity, the more a fund's share price will fluctuate in
response to changes in market interest rates.
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
11
<PAGE>
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
CONVERSION PREMIUM. The average percentage by which the weighted average market
price of the convertible securities held by a fund exceeds the weighted average
market price of their underlying common stocks. For example, if a stock is
trading at $25 per share and a bond convertible into the stock is trading at a
price equivalent to $30 per share of stock, the conversion premium is 20% ($5 /
$25 = 20%).
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a fund's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's net assets represented by
securities of companies based outside the United States.
NUMBER OF SECURITIES. An indicator of diversification. The more separate issues
a fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular security.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentages of a fund's securities that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. As this percentage rises, a fund's returns are likely
to be more volatile because they are more dependent on the fortunes of a few
companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
12
<PAGE>
FINANCIAL STATEMENTS
NOVEMBER 30, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS (62.6%)
- --------------------------------------------------------------------------------
Auto & Transportation (2.8%)
Magna International
5.00%, 10/15/2002 1,980 1,895
Tower Automotive Inc.
5.00%, 8/1/2004 3,825 3,165
------------
5,060
------------
Consumer Discretionary (11.7%)
Amazon.com, Inc.
4.75%, 2/1/2009 630 777
AnnTaylor Inc.
0.55%, 6/18/2019 4,830 2,910
Clear Channel
Communications, Inc.
1.50%, 12/1/2002 3,325 3,242
The Interpublic Group of Cos., Inc.
1.87%, 6/1/2006 3,710 3,733
Jacor Communications, Inc.
0.00%, 2/9/2018 2,155 1,331
Lamar Advertising Co.
5.25%, 9/15/2006 2,010 2,818
Mail-Well, Inc.
5.00%, 11/1/2002 2,420 2,190
Office Depot Inc.
0.00%, 12/11/2007 2,465 1,615
Scandinavian Broadcasting
System SA
7.00%, 12/1/2004 1,225 1,795
IMAX Corp.
5.75%, 4/1/2003 415 553
------------
20,964
------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
Financial Services (2.0%)
(1) Checkfree Holdings
6.50%, 12/1/2006 1,470 1,613
Mutual Risk Management Ltd.
0.00%, 10/30/2015 4,340 1,934
------------
3,547
------------
Health Care (9.3%)
(1) Affymetrix Inc.
5.00%, 10/1/2006 1,650 1,617
Alpharma Inc.
3.00%, 6/1/2006 1,995 2,249
ALZA Corp.
5.00%, 5/1/2006 1,845 2,217
Centocor Inc.
4.75%, 2/15/2005 775 1,116
(1) Roche Holdings, Inc.
0.00%, 4/20/2010 6,140 3,745
Sepracor Inc.
7.00%, 12/15/2005 5,415 5,672
------------
16,616
------------
Integrated Oils (1.9%)
Devon Energy Corp.
4.95%, 8/15/2008 3,490 3,490
------------
Other Energy (3.9%)
Diamond Offshore Drilling, Inc.
3.75%, 2/15/2007 3,345 3,404
SEACOR Holdings, Inc.
5.375%, 11/15/2006 3,770 3,652
------------
7,056
------------
13
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
Producer Durables (5.1%)
American Tower Corp.
2.25%, 10/15/2009 5,390 4,608
Lam Research Corp.
5.00%, 9/1/2002 2,515 2,779
Mark IV Industries, Inc.
4.75%, 11/1/2004 2,135 1,801
------------
9,188
------------
Technology (22.6%)
(1) ASM Lithography Holding NV
4.25%, 11/30/2004 2,460 2,651
Adaptec, Inc.
4.75%, 2/1/2004 3,605 4,146
Advanced Micro Devices, Inc.
6.00%, 5/15/2005 2,835 2,716
At Home Corp.
0.524%, 12/28/2018 3,560 2,581
Atmel Corp.
0.00%, 4/21/2018 1,545 1,035
Citrix Systems, Inc.
0.00%, 3/22/2019 2,355 1,655
Cymer, Inc.
3.50%, 8/6/2004 2,880 2,999
Cypress Semiconductor Corp.
6.00%, 10/1/2002 890 1,174
(1) Lattice Semiconductor Corp.
4.75%, 11/1/2006 3,345 4,231
Micron Technology Inc.
7.00%, 7/1/2004 1,600 1,912
(1) Safeguard Scientifics, Inc.
5.00%, 6/15/2006 1,575 2,548
Sanmina Corp.
4.25%, 5/1/2004 4,005 5,171
(1) Siebel Systems
5.50%, 9/15/2006 1,295 2,186
Solectron Corp.
0.00%, 1/27/2019 4,815 3,268
STMicroelectronics NV
0.00%, 9/22/2009 1,305 1,497
Wind River Systems Inc.
5.00%, 8/1/2002 655 806
------------
40,576
------------
Utilities (3.3%)
o AES Corp.
4.50%, 8/15/2005 785 939
Centocor, Inc.
4.75%, 2/15/2005 945 1,361
Corecomm Ltd.
6.00%, 10/1/2006 630 753
Telefonos de Mexico, SA
4.25%, 6/15/2004 2,615 2,942
------------
5,995
------------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(COST $100,377) 112,492
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (23.7%)
- --------------------------------------------------------------------------------
Auto & Transportation (2.9%)
Canadian National Railway Co.
5.25% Cvt. Pfd. 38,500 1,882
CNF Trust I 5.00% Cvt. Pfd. 21,400 1,046
Union Pacific Capital Trust
6.25% Cvt. Pfd. 51,000 2,244
------------
5,172
------------
Consumer Discretionary (1.3%)
o Emmis Communications Corp.
6.25% Cvt. Pfd. 39,600 2,396
------------
Energy (4.4%)
AES Trust III
6.75% Cvt. Pfd. 51,000 2,620
Apache Corp.
6.50% Cvt. Pfd. 67,200 2,285
Pogo Trust I
6.50% Cvt. Pfd. 41,100 1,932
Tosco Finance Trust
5.75% Cvt. Pfd. 21,600 1,018
------------
7,855
------------
Financial Services (1.4%)
CNB Capital Trust 6.00% Cvt. Pfd. 14,800 498
o Sovereign Capital Trust
7.50% Cvt. Pfd. 36,200 2,027
------------
2,525
------------
Materials & Processing (1.4%)
Georgia Pacific Group
7.50% Cvt. Pfd. 57,500 2,462
------------
Technology (3.3%)
o Decs Trust VI
6.25% Cvt. Pfd. 65,600 2,558
Global Telesystems Inc.
7.25% Cvt. Pfd. 62,800 3,415
------------
5,973
------------
Utilities (7.9%)
o Broadwing Inc.
6.75% Cvt. Pfd. 34,700 1,796
o Cox Communications, Inc.
7.75% Cvt. Pfd. 27,800 2,484
Cox Communications, Inc.
7.00% Cvt. Pfd. 45,700 2,890
o (1)Global Crossing Ltd.
6.375% Cvt. Pfd. 22,600 2,703
Intermedia Communications, Inc.
7.00% Cvt. Pfd. 54,100 1,427
o MediaOne Group, Inc.
7.00% Cvt. Pfd. 20,600 927
Winstar Communications, Inc.
7.00% Cvt. Pfd. 32,800 1,877
------------
14,104
------------
Other (1.1%)
The Seagram Co. Ltd.
7.50% Cvt. Pfd. 43,200 1,966
------------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $41,283) 42,453
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (6.7%)
- --------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.70%, 12/1/1999
(Cost $12,058) $12,058 $ 12,058
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (93.0%)
(COST $153,718) 167,003
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (7.0%) 12,629
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 13,629,715 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $179,632
================================================================================
NET ASSET VALUE PER SHARE $13.18
================================================================================
* See Note A in Notes to Financial Statements.
o Non-Income Producing Security. New issue that has not paid a dividend as of
November 30, 1999.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At November 30,
1999, the aggregate value of these securities was $21,294,000 representing
11.9% of net assets.
- --------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Assets
Investments in Securities, at Value $167,003
Receivables for Investment Securities Sold 16,077
Other Assets--Note C 1,182
------------
Total Assets 184,262
------------
Liabilities
Payables for Investment Securities Purchased (1,917)
Other Liabilities (2,713)
------------
Total Liabilities (4,630)
------------
- --------------------------------------------------------------------------------
NET ASSETS $179,632
================================================================================
- --------------------------------------------------------------------------------
AT NOVEMBER 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid in Capital $155,676 $11.42
Undistributed Net
Investment Income 1,167 .09
Accumulated Net Realized
Gains--Note D 9,504 .70
Unrealized Appreciation--Note E 13,285 .97
- --------------------------------------------------------------------------------
NET ASSETS $179,632 $13.18
================================================================================
15
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends $ 2,526
Interest 5,536
Security Lending 74
------------
Total Income 8,136
------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 695
Performance Adjustment (369)
The Vanguard Group--Note C
Management and Administrative 509
Marketing and Distribution 26
Custodian Fees 34
Auditing Fees 7
Shareholders' Reports 15
------------
Total Expenses 917
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 7,219
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 10,911
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 19,254
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $37,384
================================================================================
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
---------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income 7,219 8,146
Realized Net Gain (Loss) 10,911 (1,376)
Change in Unrealized Appreciation (Depreciation) 19,254 (10,995)
---------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 37,384 (4,225)
Distributions ---------------------------
Net Investment Income (8,161) (8,273)
Realized Capital Gain -- (16,111)
---------------------------
Total Distributions (8,161) (24,384)
Capital Share Transactions1 ---------------------------
Issued 28,408 40,843
Issued in Lieu of Cash Distributions 6,782 21,712
Redeemed (56,911) (50,920)
---------------------------
Net Increase (Decrease) from Capital Share
Transactions (21,721) 11,635
- --------------------------------------------------------------------------------
Total Increase (Decrease) 7,502 (16,974)
- --------------------------------------------------------------------------------
Net Assets
Beginning of Year 172,130 189,104
---------------------------
End of Year $179,632 $172,130
================================================================================
1Shares Issued (Redeemed)
Issued 2,386 3,441
Issued in Lieu of Cash Distributions 603 1,873
Redeemed (4,869) (4,337)
---------------------------
Net Increase (Decrease) in Shares Outstanding (1,880) 977
================================================================================
17
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a Share Outstanding Throughout Each Year 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%
Portfolio Turnover Rate 162% 186% 182% 97% 46%
=====================================================================================================
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Convertible Securities Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the latest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Temporary cash investments are valued at cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Discounts on debt
securities purchased are accreted to interest income over the lives of the
respective securities.
B. Oaktree Capital Management, LLC, provides investment advisory services to the
fund for a fee calculated at an annual percentage rate of average net assets.
The basic fee is subject to quarterly adjustments based on performance relative
to the Credit Suisse First Boston Convertible Securities Index. For the year
ended November 30, 1999, the advisory fee represented an effective annual rate
of 0.41% of the fund's average net assets before a decrease of $369,000 (0.22%)
based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At November 30, 1999, the fund had contributed capital of $35,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.04% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. During the year ended November 30, 1999, the fund purchased $264,904,000 of
investment securities and sold $311,134,000 of investment securities, other than
temporary cash investments. The fund used a capital loss carryforward of
$1,465,000 to offset taxable capital gains realized during the year ended
November 30, 1999, reducing the amount of capital gains that would otherwise be
available to distribute to shareholders.
E. At November 30, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $13,285,000,
consisting of unrealized gains of $16,275,000 on securities that had risen in
value since their purchase and $2,990,000 in unrealized losses on securities
that had fallen in value since their purchase.
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Convertible Securities Fund
In our opinion, the accompanying statements of net assets and of assets and
liabilities, and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of Vanguard Convertible Securities Fund (the "Fund") at
November 30, 1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 6, 2000
21
<PAGE>
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SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD CONVERTIBLE SECURITIES FUND
This information for the fiscal year ended November 30, 1999, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 12.2% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
- --------------------------------------------------------------------------------
22
<PAGE>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- --------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
- --------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- --------------------------------------------------------------------------------
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida,
Massachusetts, New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Admiral Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated
and managed in your best interests since, as a shareholder, you are part owner
of the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN C. BOGLE * (1967) Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN * (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN * (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY * (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEl * (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. * (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL * (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. * (1971)Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON * (1985) Retired Chairman of Rohm & Haas Co.; Director of
Cummins Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY * Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS * Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON * Legal Department.
ROBERT A. DISTEFANO * Information Technology.
JAMES H. GATELY * Individual Investor Group.
KATHLEEN C. GUBANICH * Human Resources.
IAN A. MACKINNON * Fixed Income Group.
F. WILLIAM MCNABB, III * Institutional Investor Group.
MICHAEL S. MILLER * Planning and Development.
RALPH K. PACKARD * Chief Financial Officer.
GEORGE U. SAUTER * Core Management Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
All comparative mutual fund data are from Lipper Inc. or Morningstar,
Inc., unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights
relating to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000"
are trademarks of Wilshire Associates.
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q820-01/26/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
