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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. 22
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 25
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
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON MARCH 19, 2001, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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VANGUARD CONVERTIBLE SECURITIES FUND
INVESTOR SHARES
MARCH 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
November 30, 2000.
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.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD CONVERTIBLE SECURITIES FUND
PROSPECTUS
March 19, 2001
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CONTENTS
1 FUND PROFILE
4 ADDITIONAL INFORMATION
4 MORE ON THE FUND
11 THE FUND AND VANGUARD
11 INVESTMENT ADVISER
12 DIVIDENDS, CAPITAL GAINS, AND TAXES
14 SHARE PRICE
14 FINANCIAL HIGHLIGHTS
16 INVESTING WITH VANGUARD
16 Buying Shares
17 Redeeming Shares
19 Other Rules You Should Know
21 Fund and Account Updates
22 Contacting Vanguard
GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the
right investment for you. We suggest that you keep this prospectus for future
reference.
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<PAGE>
1
FUND PROFILE
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 or
common stock attached. Convertible securities tend to have credit ratings that
are below investment-grade.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
o Credit risk, which is the chance that a convertible security issuer will
fail to pay interest or dividends and principal in a timely manner.
Companies that issue convertible securities are usually small to medium
size, and they often have low credit ratings. In addition, the credit
rating of a company's convertible securities is generally lower than that
of its conventional debt securities. Convertibles 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. Credit risk should be high for the Fund, because it invests
mainly in securities with low credit quality.
o Interest rate risk, which is the chance that prices of convertible
securities will decline along with overall bond prices, over short or even
long periods, because of rising interest rates. Convertible securities are
particularly sensitive to interest rate changes when their predetermined
conversion price is much higher than the issuing company's common stock.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
o Sector risk, which is the chance that the Fund's returns could be hurt
significantly by problems affecting a particular economic sector. With a
substantial portion of the convertible securities market currently
concentrated in certain economic sectors--such as the technology,
telecommunications, and media sectors--sector risk is quite high for the
Fund. Historically, securities in these sectors have been more volatile in
price than securities in other economic sectors, although the sectors in
the convertible market do shift over time.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of a
broad-based securities market index over set periods of time. Keep in mind that
the Fund's past performance does not indicate how it will perform in the future.
<PAGE>
2
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ANNUAL TOTAL RETURNS
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[SCALE]
1991 %
1992 %
1993 %
1994 %
1995 %
1996 %
1997 %
1998 %
1999 %
2000 %
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During the period shown in the bar chart, the highest return for a calendar
quarter was .% (quarter ended .), and the lowest return for a quarter was .%
(quarter ended .).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Convertible Securities Fund .% .% .%
CS First Boston Convertible Securities Index . . .
Average Convertible Securities Fund* . . .
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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 on those incurred in the fiscal year ended November 30, 2000.
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: X.XX%
12b-1 Distribution Fee: None*
Other Expenses: X.XX%
TOTAL ANNUAL FUND OPERATING EXPENSES: X.XX%
* A $5 fee applies to wire redemptions under $5,000.
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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
2000 was .%, or $. per $1,000 of average net assets. The average convertible
securities mutual fund had expenses in 2000 of .%, or $. 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
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of the given period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$XX $XX $XX $XX
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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
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
March, June, September, and December; custodial 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, 2000 TICKER SYMBOL
NETASSETS VCVSX
SUITABLE FOR IRAS
Yes
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MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. 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 any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities 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 Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental. In addition, you
will find information on other important features of the Fund.
MARKET EXPOSURE
Normally, the Fund invests 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 amount of stock at a predetermined price)
or common stock attached. The remainder of the Fund's assets will be invested in
non-convertible corporate or U.S. government bonds, common stocks, or money
market instruments.
Because it invests mainly in convertible securities, the Fund is subject to
certain risks that other investment strategies may not be subject to.
<PAGE>
5
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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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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 more like the common stock. In such a case, the
convertible security's price may be as volatile as that of the common stocks.
[FLAG] PRICES OF THE FUND'S CONVERTIBLE HOLDINGS MAY FLUCTUATE IN RESPONSE TO
PRICE CHANGES IN THE UNDERLYING COMMON STOCKS. THEREFORE, 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.
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 *% *% *% *%
Worst * * * *
Average * * * *
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
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 2000). 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 the Fund in particular.
<PAGE>
6
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.
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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 of
comparable quality and maturity 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 probably 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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Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of 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 AFTER A AFTER A AFTER A
1% 1% 2% 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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These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or the Fund in
particular.
<PAGE>
7
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PLAIN TALK ABOUT
CONVERTIBLE SECURITIES MARKET
While all markets are prone to change over time, the generally high rate at
which convertible securities are retired (through conversion, redemption, or
maturity) and replaced with newly issued convertibles causes this market to
change more rapidly than others. Changes in the past few years in particular,
have increased the risk profile of convertible securities. First, a
disproportionate amount of new convertibles have been in the technology,
telecommunications, and media sectors. This concentration of available
securities has elevated above historic levels the sensitivity of the convertible
securities market to the volatility of the equity markets and the special risks
of those sectors. Second, the recent proliferation of convertible securities
with innovative structures, such as mandatory conversion securities, and
equity-linked securities, has increased the sensitivity of this market to equity
market volatility and the special risks of those innovations. Third, while
convertible securities have historically maintained lower credit quality than
other fixed income securities, convertibles have recently experienced a
substantial decline in credit quality. Many convertibles are rated below
investment grade or are not rated, and therefore may be considered speculative
investments.
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[FLAG] THE FUND IS SUBJECT TO SECTOR RISK, WHICH IS THE CHANCE THAT RETURNS FROM
THE ECONOMIC SECTORS IN WHICH CONVERTIBLE SECURITIES ARE CONCENTRATED--
CURRENTLY THE TECHNOLOGY, TELECOMMUNICATIONS, AND MEDIA SECTORS--WILL TRAIL
RETURNS FROM OTHER ECONOMIC SECTORS. AS A GROUP, THESE SECTORS TEND TO GO
THOUGH CYCLES OF DOING BETTER - OR WORSE - THAN THE CONVERTIBLES MARKET IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS. SECTOR RISK IS QUITE HIGH FOR THE FUND.
Securities with innovative structures have become increasingly prevalent in
the convertible securities market. These include "mandatory conversion"
securities, which consist of debt securities or preferred stocks that convert
automatically into equity securities of the same or a different issuer at a
specified date and conversion ratio. Mandatory conversion securities may offer
limited potential for capital appreciation and, in some instances, are subject
to complete loss of invested capital. Other innovative convertibles include
"equity-linked" securities, which are securities or derivatives that may have
fixed, variable, or no interest payments prior to maturity, may convert (at the
option of the holder or on a mandatory basis) into any cash or a combination of
cash and equity securities, and may be structured to limit the potential for
capital appreciation. Equity-linked securities may be illiquid and difficult to
value and may be subject to greater credit risk than other convertibles.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A
CONVERTIBLE SECURITY ISSUER WILL FAIL TO PAY INTEREST OR DIVIDENDS AND
PRINCIPAL IN A TIMELY MANNER.
<PAGE>
8
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PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance--in the rating agency's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming a higher risk of payment default. Bonds rated in one of
the four highest rating categories are considered "investment grade."
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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 of the company's conventional debt securities,
since convertibles 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, Inc. or B, BB, or BBB by Standard and
Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. 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.
[FLAG] BONDS RATED LESS THAN BAA BY MOODY'S OR BBB BY STANDARD & POOR'S, SUCH AS
THOSE HELD BY THE FUND, ARE CLASSIFIED AS NON-INVESTMENT GRADE. THESE BONDS
CARRY A HIGH DEGREE OF RISK AND ARE CONSIDERED SPECULATIVE BY THE MAJOR
RATING AGENCIES.
As of November 30, 2000, the Fund's convertible securities holdings had the
following credit quality characteristics:
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INVESTMENT* PERCENT OF FUND'S NET ASSETS
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AAA/Aaa .%
AA/Aa .%
A/A .%
BBB/Baa .%
BB/Ba .%
B/B .%
CCC/Ccc .%
CC/Ca .%
C/C .%
Nonrated Securities .%
*Excludes common and preferred stocks and derivatives, which are not subject to
ratings categorization.
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<PAGE>
9
SECURITY SELECTION
Oaktree Capital Management, LLC, a registered investment adviser under the
Investment Advisers Act of 1940, as amended, (Oaktree), acts as the investment
adviser to the Fund and will generally select 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 the
adviser's opinion, be priced at a reasonable premium relative to the price at
which it can be converted into common stock. Oaktree will generally sell a
convertible security when the underlying stock price exceeds the conversion
price by a reasonable margin. When a convertible security reaches this level it
may be considered an equity substitute.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING SECURITIES.
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 is authorized to 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. As a result,
the Fund is subject to country risk, which is the chance that domestic
events--such as political upheaval, financial troubles, or a natural
disaster--will weaken a country's securities markets.
The Fund may also invest 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemption requests or other needs
while simulating full investment in stocks.
o 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 investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise may fail to achieve its
investment objective.
<PAGE>
10
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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). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks for the
investor. Although the Fund does not currently invest in such securities, it may
in the future.
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COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
o Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
o Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
o Each Vanguard fund reserves the right to stop offering shares at any time.
o Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
o Certain Vanguard funds charge transaction fees on purchase and/or
redemptions of their shares.
o Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
<PAGE>
11
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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 taxable
income. As of November 30, 2000, the average turnover rate for all convertible
securities funds was approximately *%, according to Morningstar, Inc.
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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 $550 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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INVESTMENT ADVISER
Oaktree Capital Management, LLC (Oaktree), 333 South Grand Avenue, 28th Floor,
Los Angeles, CA 90071, adviser to the Fund, is an investment advisory firm
founded in 1995. Oaktree focuses on certain specialized investment areas,
including convertible securities. As of November 30, 2000, Oaktree managed about
$* in assets. The firm manages the Fund subject to the control of the trustees
and officers of the Fund.
Oaktree's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Oaktree's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the Credit Suisse First Boston
Convertible Securities Index over the same period. Please consult the Fund's
Statement of Additional Information for a complete explanation of how advisory
fees are calculated.
For the fiscal year ended November 30, 2000, the advisory fee represented
an effective annual rate of 0.XX% of the Fund's average net assets [PERFORMANCE
INCREASE/DECREASE].
<PAGE>
12
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or 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
The manager primarily responsible for overseeing the Fund's investments is:
LARRY W. KEELE, Principal and a founder of Oaktree Capital Management, LLC in
1995. He has worked in investment management since 1981; has managed portfolio
investments since 1983; and has managed the Fund since 1995. Education: B.A.,
Tennessee Tech University; M.B.A. in Finance, University of South Carolina.
--------------------------------------------------------------------------------
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 to purchase more shares of
the Fund.
<PAGE>
13
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion 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 any stock
holdings and the interest it receives from any 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.
--------------------------------------------------------------------------------
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:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts to purchase additional Fund shares.
o 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.
o Any dividend and capital gains that you receive are taxable to you as
ordinary income for federal income tax purposes.
o 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.
o Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
o 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.
o 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:
o provide us with your correct taxpayer identification number;
o certify that the taxpayer identification number is correct; and
o confirm that you are not subject to backup withholding.
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 to purchase additional Fund share for your
account 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.
<PAGE>
14
Please consult your tax adviser for detailed information about the 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), you should avoid buying 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 dividing the net assets of the
Fund by the number of Fund shares outstanding as of the calculation date.
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."
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 for
the Fund, 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.
<PAGE>
15
--------------------------------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEEMBER 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
NET ASSET VALUE, $13.18 $11.10 $13.01 $13.07 $12.03
BEGINNING OF YEAR
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .52 .52 .53 .43
Net Realized and
Unrealized Gain (Loss) 2.13 (.77) 1.17 1.29
on Investments
--------------------------------------------------------------------------------
Total from Investment
Operations 2.65 (.25) 1.70 1.72
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.57) (.54) (.47) (.54)
Distributions from
Realized Capital - (1.12) (1.29) (.14)
Gains
--------------------------------------------------------------------------------
Total Distributions (.57) (1.66) (1.76) (.68)
--------------------------------------------------------------------------------
NET ASSET VALUE, END $13.18 $11.10 $13.01 $13.07
OF YEAR
================================================================================
TOTAL RETURN 24.85% -2.16% 14.81% 14.88%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $180 $172 $189 $170
Ratio of Total Expenses
to Average Net Assets 0.55% 0.73% 0.67% 0.69%
Ratio of Net
Investment Income to
Average Net Assets 4.30% 4.36% 4.29% 3.43%
Turnover Rate 162% 186% 182% 97%
================================================================================
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $13.18 per share.
During the year, the Fund earned $0.XX per share from investment income
(interest and dividends) and $0.XX per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.XX per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($X.XX per share) minus the distributions ($0.XX per share)
resulted in a share price of $XX.XX at the end of the year. This was an increase
of $0.XX per share (from $13.18 at the beginning of the year to $XX.XX 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 XX.XX% for the year.
As of November 30, 2000, the Fund had $XX billion in net assets. For the year,
its expense ratio was 0.XX% ($X.X0 per $1,000 of net assets); and its net
investment income amounted to 0.XX% of its average net assets. It sold and
replaced securities valued at XX% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
16
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT: IWV MININVEST for regular accounts; $1,000 for
IRAs and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. Make the check payable to: The
Vanguard Group-82. For addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard accepts your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU SHOULD KNOW
* THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
<PAGE>
17
* U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and
drawn on a U.S. bank.
* LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
* NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
* FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
REDEEMING SHARES
HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard accepts your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.
TYPES OF REDEMPTIONS
* CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a
check, normally within two business days of your trade date.
* EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your
redemption to purchase shares of another Vanguard fund. All open Vanguard funds
accept exchange redemptions requested in writing. Most Vanguard funds--other
than the stock and balanced index-oriented funds--also accept exchange
redemptions requested online or by telephone. See Other Rules You Should Know
for specifics.
* WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or the
Preferrred Stock Fund, you
<PAGE>
18
may instruct Vanguard to wire your redemption proceeds to a previously
designated bank account. Wire redemptions are not available for Vanguard's other
funds. The wire redemption option is not automatic; you must establish it by
completing a special form or the appropriate section of your account
registration. Also, wire redemptions must be requested in writing or by
telephone, not online. A $5 fee applies to wire redemptions under $5,000.
Money Market Funds: For telephone requests accepted at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests accepted before 4 p.m., Eastern time,
the redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds and Preferred Stock Fund: For requests accepted at Vanguard by 4
p.m., Eastern time, the redemption proceeds will arrive at your bank by the
close of business on the following business day.
REDEMPTION RULES YOU SHOULD KNOW
* SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
* POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
* RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
* SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
* PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings
<PAGE>
19
banks, credit unions, trust companies, or member firms of a U.S. stock exchange.
* NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
* EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
* AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
* TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
* PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
o Ten-digit account number.
o Complete owner name and address.
o Primary Social Security or employer identification number.
o Personal Identification Number (PIN), if applicable.
* SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
* SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.
VANGUARD.COM
* REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of most Vanguard funds, and to perform
other transactions. To establish this service, you can register online.
* SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not
<PAGE>
20
permit online exchanges (in or out), except for IRAs and certain other
retirement accounts.
WRITTEN INSTRUCTIONS
* "GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
o The fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account.
o Signature guarantees, if required for the type of transaction.*
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY
MARKET FUND during any 12-month period.
o Your round trips through a non-money market fund must be at least 30 days
apart.
o All funds may refuse share purchases at any time, for any reason.
o Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same 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.
<PAGE>
21
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds 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.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or other retirement plans.
REPORTS
You will receive financial reports about your funds twice a year--in June and
December. These comprehensive reports
<PAGE>
22
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 funds' costs as low as possible (so that you and other
shareholders can keep more of the funds' investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more 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, however, you may notify our Client
Services Department.
CONTACTING VANGUARD
ONLINE
VANGUARD.COM
o Your best source of Vanguard news
o For fund, account, and service information
o For most account transactions
o For literature requests
o 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)
o For automated fund and account information
o For redemptions by check, exchange, or wire
o Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335)
o For fund and service information
o For literature requests
o Business hours only
CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273)
o For account information
o For most account transactions
o Business hours only
INSTITUTIONAL DIVISION 1-888-809-8102
o For information and services for large institutional investors
o Business hours only
<PAGE>
23
VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBER
Always use this fund number when contacting us about Vanguard Convertible
Securities Fund-82.
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<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 a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
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 a bond's maturity; also known as the par value or
principal.
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. Bonds rated in one of the four highest rating categories
are considered "investment-grade."
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.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming 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>
[SHIP]
[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.
All market indexes referenced
in this prospectus are the exclusive
property of their respective owners.
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 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or you
can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-4627
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P082N 032001
<PAGE>
VANGUARD CONVERTIBLE SECURITIES FUND
FOR PARTICIPANTS
MARCH 19, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
November 30, 2000.
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.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD CONVERTIBLE SECURITIES FUND
PARTICIPANT PROSPECTUS
MARCH 19, 2001
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE
2 ADDITIONAL INFORMATION
2 MORE ON THE FUND
6 THE FUND AND VANGUARD
7 INVESTMENT ADVISER
8 DIVIDENDS, CAPITAL GAINS, AND TAXES
8 SHARE PRICE
9 FINANCIAL HIGHLIGHTS
11 INVESTING WITH VANGUARD
12 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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.
-------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
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 or --
common stock attached. Convertible securities tend to have credit ratings that
are below investment-grade.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
o Credit risk, which is the chance that a convertible security issuer will
fail to pay interest or dividends and principal in a timely manner.
Companies that issue convertible securities are usually small to medium
size, and they often have low credit ratings. In addition, the credit
rating of a company's convertible securities is generally lower than that
of its conventional debt securities. Convertibles 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. Credit risk should be high for the Fund, because it invests
mainly in securities with low credit quality.
o Interest rate risk, which is the chance that prices of convertible
securities will decline along with overall bond prices, over short or even
long periods, because of rising interest rates. Convertible securities are
particularly sensitive to interest rate changes when their predetermined
conversion price is much higher than the issuing company's common stock.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
o Sector risk, which is the chance that the Fund's returns could be hurt
significantly by problems affecting a particular economic sector. With a
substantial portion of the convertible securities market currently
concentrated in certain economic sectors--such as the technology,
telecommunications, and media sectors--sector risk is quite high for the
Fund. Historically, securities in these sectors have been more volatile in
price than securities in other economic sectors, although the sectors in
the convetible market do shift over time.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of a
broad-based securities market index over set periods of time. Keep in mind that
the Fund's past performance does not indicate how it will perform in the future.
<PAGE>
2
-----------------------------------------------------
ANNUAL TOTAL RETURNS
-----------------------------------------------------
[SCALE]
1991 %
1992 %
1993 %
1994 %
1995 %
1996 %
1997 %
1998 %
1999 %
2000 %
-----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was .% (quarter ended .) and the lowest return for a quarter was .%
(quarter ended .).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------
Vanguard Convertible Securities Fund .% .% .%
CS First Boston Convertible Securities Index . . .
Average Convertible Securities Fund* . . .
--------------------------------------------------------------------------
*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 on those incurred in the fiscal year ended November 30, 2000.
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: X.XX%
12b-1 Distribution Fee: None
Other Expenses: X.XX%
TOTAL ANNUAL FUND OPERATING EXPENSES: X.XX%
* A $5 fee applies to wire redemptions under $5,000.
<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
2000 was .%, or $. per $1,000 of average net assets. The average convertible
securities mutual fund had expenses in 2000 of .%, or $. 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 the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$XX $XX $XX $XX
--------------------------------------------------
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
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, 2000
NETASSETS
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. 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 any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities 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 Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as fundamental. In addition, you
will find information on other important features of the Fund.
MARKET EXPOSURE
Normally, the Fund invests 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 amount of stock at a predetermined price)
or common stock attached. The remainder of the Fund's assets will be invested in
non-convertible corporate or U.S. government bonds, common stocks, or money
market instruments.
Because it invests mainly in convertible securities, the Fund is subject to
certain risks that other investment strategies may not be subject to.
<PAGE>
5
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 more like the common stock. In such a case, the
convertible security's price may be as volatile as that of the common stocks.
[FLAG] PRICES OF THE FUND'S CONVERTIBLE HOLDINGS MAY FLUCTUATE IN RESPONSE TO
PRICE CHANGES IN THE UNDERLYING COMMON STOCKS. THEREFORE, 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.
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 *% *% *% *%
Worst * * * *
Average * * * *
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
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 2000). 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 the Fund in particular. 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 charac-
<PAGE>
6
teristics of a bond. At such times, the price of the security will move in the
opposite direction of interest rates.
--------------------------------------------------------------------------------
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 of
comparable quality and maturity 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 probably 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.
--------------------------------------------------------------------------------
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of 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 AFTER A AFTER A AFTER A
1% 1% 2% 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
----------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or the Fund in
particular.
<PAGE>
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
CONVERTIBLE SECURITIES MARKET
While all markets are prone to change over time, the generally high rate at
which convertible securities are retired (through conversion, redemption, or
maturity) and replaced with newly issued convertibles causes this market to
change more rapidly than others. Changes in the past few years in particular,
have increased the risk profile of convertible securities. First, a
disproportionate amount of new convertibles have been in the technology,
telecommunications, and media sectors. This concentration of available
securities has elevated above historic levels the sensitivity of the convertible
securities market to the volatility of the equity markets and the special risks
of those sectors. Second, the recent proliferation of convertible securities
with innovative structures, such as mandatory conversion securities, and
equity-linked securities, has increased the sensitivity of this market to equity
market volatility and the special risks of those innovations. Third, while
convertible securities have historically maintained lower credit quality than
other fixed income securities, convertibles have recently experienced a
substantial decline in credit quality. Many convertibles are rated below
investment grade or are not rated, and therefore may be considered speculative
investments.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO SECTOR RISK, WHICH IS THE CHANCE THAT RETURNS FROM
THE ECONOMIC SECTORS IN WHICH CONVERTIBLE SECURITIES ARE CONCENTRATED--
CURRENTLY THE TECHNOLOGY, TELECOMMUNICATIONS, AND MEDIA SECTORS--WILL TRAIL
RETURNS FROM OTHER ECONOMIC SECTORS. AS A GROUP, THESE SECTORS TEND TO GO
THOUGH CYCLES OF DOING BETTER - OR WORSE - THAN THE CONVERTIBLES MARKET IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS. SECTOR RISK IS QUITE HIGH FOR THE FUND.
Securities with innovative structures have become increasingly prevalent in
the convertible securities market. These include "mandatory conversion"
securities, which consist of debt securities or preferred stocks that convert
automatically into equity securities of the same or a different issuer at a
specified date and conversion ratio. Mandatory conversion securities may offer
limited potential for capital appreciation and, in some instances, are subject
to complete loss of invested capital. Other innovative convertibles include
"equity-linked" securities, which are securities or derivatives that may have
fixed, variable, or no interest payments prior to maturity, may convert (at the
option of the holder or on a mandatory basis) into any cash or a combination of
cash and equity securities, and may be structured to limit the potential for
capital appreciation. Equity-linked securities may be illiquid and difficult to
value and may be subject to greater credit risk than other convertibles.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A
CONVERTIBLE SECURITY ISSUER WILL FAIL TO PAY INTEREST OR DIVIDENDS AND
PRINCIPAL IN A TIMELY MANNER.
<PAGE>
8
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance--in the rating agency's opinion--that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming a higher risk of payment default. Bonds rated in one of
the four highest rating categories are considered "investment grade."
--------------------------------------------------------------------------------
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 of the company's conventional debt securities,
since convertibles 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, Inc. or B, BB, or BBB by Standard and
Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. 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.
[FLAG] BONDS RATED LESS THAN BAA BY MOODY'S OR BBB BY STANDARD & POOR'S, SUCH AS
THOSE HELD BY THE FUND, ARE CLASSIFIED AS NON-INVESTMENT GRADE. THESE BONDS
CARRY A HIGH DEGREE OF RISK AND ARE CONSIDERED SPECULATIVE BY THE MAJOR
RATING AGENCIES.
As of November 30, 2000, the Fund's convertible securities holdings had the
following credit quality characteristics:
--------------------------------------------------------------------------------
INVESTMENT* PERCENT OF FUND NET ASSETS
--------------------------------------------------------------------------------
AAA/Aaa .%
AA/Aa .%
A/A .%
BBB/Baa .%
BB/Ba .%
B/B .%
CCC/Ccc .%
CC/Ca .%
C/C .%
Nonrated Securities .%
*Excludes common and preferred stocks and derivatives, which are not subject to
ratings categorization.
--------------------------------------------------------------------------------
<PAGE>
9
SECURITY SELECTION
Oaktree Capital Management, LLC, a registered investment adviser under the
Investment Advisers Act of 1940, as amended, (Oaktree), acts as the investment
adviser to the Fund and will generally select 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 the
adviser's opinion, be priced at a reasonable premium relative to the price at
which it can be converted into common stock. Oaktree will generally sell a
convertible security when the underlying stock price exceeds the conversion
price by a reasonable margin. When a convertible security reaches this level it
may be considered an equity substitute.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING SECURITIES.
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 is authorized to invest up to 20% of its assets in foreign
securities that are denominated in U.S. dollars. These securities may be traded
on U.S. or foreign markets. As a result, the Fund is subject to country risk,
which is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets.
The Fund may also invest 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemption requests or other needs
while simulating full investment in stocks.
o 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 investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise may fail to achieve its
investment objective.
<PAGE>
10
--------------------------------------------------------------------------------
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). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks for the
investor. Although the Fund does not currently invest in such securities, it may
in the future.
--------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
o Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
o Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
o Each Vanguard fund reserves the right to stop offering shares at any time.
o Certain Vanguard funds charge transaction fees on purchase and/or
redemptions of their shares.
o Vanguard funds that hold foreign securities may value those securities at
their "fair value," rather than the price at which those securities last
traded on their primary foreign markets or exchanges, to take into account
events that occur after the close of those markets or exchanges.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
<PAGE>
11
--------------------------------------------------------------------------------
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 taxable
income. As of November 30, 2000, the average turnover rate for all convertible
securities funds was approximately *%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
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 $550 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.
--------------------------------------------------------------------------------
INVESTMENT ADVISER
Oaktree Capital Management, LLC (Oaktree), 333 South Grand Avenue, 28th Floor,
Los Angeles, CA 90071, adviser to the Fund, is an investment advisory firm
founded in 1995. Oaktree focuses on certain specialized investment areas,
including convertible securities. As of November 30, 2000, Oaktree managed about
$* in assets. The firm manages the Fund subject to the control of the trustees
and officers of the Fund.
Oaktree's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Oaktree's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the Credit Suisse First Boston
Convertible Securities Index over the same period. Please consult the Fund's
Statement of Additional Information for a complete explanation of how advisory
fees are calculated.
For the fiscal year ended November 30, 2000, the advisory fee represented
an effective annual rate of 0.XX% of the Fund's average net assets [PERFORMANCE
INCREASE/DECREASE].
<PAGE>
12
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the adviser to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or 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
The manager primarily responsible for overseeing the Fund's investments is:
LARRY W. KEELE, Principal and a founder of Oaktree Capital Management, LLC in
1995. He has worked in investment management since 1981; has managed portfolio
investments since 1983; and has managed the Fund since 1995. Education: B.A.,
Tennessee Tech University; M.B.A. in Finance, University of South Carolina.
--------------------------------------------------------------------------------
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.
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.
<PAGE>
13
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion 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 any stock
holdings and the interest it receives from any 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 dividing the net assets of the
Fund by the number of Fund shares outstanding as of the calculation date.
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."
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 for
the Fund, 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.
<PAGE>
14
--------------------------------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEEMBER 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
NET ASSET VALUE, $13.18 $11.10 $13.01 $13.07 $12.03
BEGINNING OF YEAR
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .52 .52 .53 .43
Net Realized and
Unrealized Gain (Loss) 2.13 (.77) 1.17 1.29
on Investments
--------------------------------------------------------------------------------
Total from Investment
Operations 2.65 (.25) 1.70 1.72
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.57) (.54) (.47) (.54)
Distributions from
Realized Capital - (1.12) (1.29) (.14)
Gains
--------------------------------------------------------------------------------
Total Distributions (.57) (1.66) (1.76) (.68)
--------------------------------------------------------------------------------
NET ASSET VALUE, END $13.18 $11.10 $13.01 $13.07
OF YEAR
================================================================================
TOTAL RETURN 24.85% -2.16% 14.81% 14.88%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $180 $172 $189 $170
Ratio of Total Expenses
to Average Net Assets 0.55% 0.73% 0.67% 0.69%
Ratio of Net
Investment Income to
Average Net Assets 4.30% 4.36% 4.29% 3.43%
Turnover Rate 162% 186% 182% 97%
================================================================================
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $13.18 per share.
During the year, the Fund earned $0.XX per share from investment income
(interest and dividends) and $0.XX per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.XX per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($X.XX per share) minus the distributions ($0.XX per share)
resulted in a share price of $XX.XX at the end of the year. This was an increase
of $0.XX per share (from $13.18 at the beginning of the year to $XX.XX 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 XX.XX% for the year.
As of November 30, 2000, the Fund had $XX billion in net assets. For the year,
its expense ratio was 0.56% ($5.60 per $1,000 of net assets); and its net
investment income amounted to 0.XX% of its average net assets. It sold and
replaced securities valued at XX% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
15
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.
o 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 Access Center, toll-free, at 1-800-523-1188.
o 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:
o Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
o Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
o 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>
16
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; the
online Education Center 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>
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 a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
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 a bond's maturity; also known as the par value or
principal.
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. Bonds rated in one of the four highest rating categories
are considered "investment-grade."
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.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming 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>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
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.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
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 ACCESS 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 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or you
can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-4627
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I082N 032001
<PAGE>
PART B
VANGUARD CONVERTIBLE SECURITIES FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
MARCH 19, 2001
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated March 19, 2001). 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-4
INVESTMENT ADVISORY SERVICES.....................................B-8
PORTFOLIO TRANSACTIONS...........................................B-10
INVESTMENT POLICIES..............................................B-11
FINANCIAL STATEMENTS.............................................B-18
YIELD AND TOTAL RETURN...........................................B-18
SHARE PRICE......................................................B-19
COMPARATIVE INDEXES..............................................B-20
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS..................B-23
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, as amended, (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, 2001 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7042, 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. Unless otherwise required by applicable law, 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 of the Fund.
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 of 1986, as amended. 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 shares means
the lesser of: (i) 67% or more of the shares voted, so long as more than 50% of
the Fund's outstanding shares are present or represented by proxy; or (ii) more
than 50% of the Fund's outstanding shares.
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 purchase price of shares of the Fund is the net asset value per share next
determined after the order is received. The net asset value per share is
calculated as of the close of the New York Stock Exchange (the Exchange) on each
day the Exchange is open for business. An order received prior to the close of
the Exchange will be executed at the price computed on the date of receipt; and
an order received after the close of the Exchange will be executed at the price
computed on the next day the Exchange is open.
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.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares (i) during any period that 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.
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 (except Mr. MacLaury)
also serves as a Director of The Vanguard Group, Inc. In addition, each trustee
serves as a trustee of each of the 109 funds administered by Vanguard (107 in
the case of Mr. Malkiel and 99 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.
B-4
<PAGE>
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.
CHARLES D. ELLIS (DOB: 10/23/37), Trustee Retired Managing Partner of Greenwich
Associates (International Business Strategy Consulting); Successor Trustee of
Yale University; Overseer of the Stern School of Business at New York
University; and Trustee of the Whitehead Institute for Biomedical Research.
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 Argentaria, Gestion, BKF Capital (Investment Management),
The Jeffrey Co. (Holding Company), NeuVis, Inc. (Software 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).
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 and CEO of Rohm &
Haas Co. (Chemicals); Director of Cummins Engine Co. (Diesel Engines), and The
Mead Corp. (Paper Products); and AmeriSource Health Corp. (Pharmaceutical
Distribution); 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.
*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, which consists of more than 100 funds. Through their
jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Fund, and the
other funds in the The Vanguard Group obtain at cost virtually all of their
corporate management, administrative, and distribution services.
B-5
<PAGE>
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.
Each fund's officers are also officers and employees of Vanguard. No
officer or employee owns, or is permitted to own, any securities of any external
adviser for the funds.
Vanguard and the Funds' advisers have adopted Codes of Ethics designed to
prevent employees who may have access to nonpublic information about the trading
activities of the Funds (access persons) from profiting from that information.
The Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the Funds, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Funds.
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. At
November 30, 2000, the Fund had contributed capital to Vanguard representing .%
of the Fund's net assets. The total amount contributed by the Fund was $. which
represented .% of Vanguard's capitalization. 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.
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
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 0.20 of 1% of
its average month-end net assets.
During the fiscal years ended November 30, 1998, 1999, and 2000, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution, and marketing expenses: $529,000,
$535,000, and $.,000, respectively.
B-6
<PAGE>
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 below), 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.
VANGUARD CONVERTIBLE SECURITIES FUND TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS FROM ALL
COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL VANGUARD FUNDS
FROM THESE FUNDS' BENEFITS UPON PAID TO
NAMES OF TRUSTEES THESE FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
---------------------------------------------------------------------------------------------------------
John J. Brennan None None None None
Charles D. Ellis(3) None None None None
JoAnn Heffernan Heisen $ $ $ $
Bruce K. MacLaury $ $ $ $
Burton G. Malkiel $ $ $ $
Alfred M. Rankin, Jr. $ $ $ $
James O. Welch, Jr. $ $ $ $
J. Lawrence Wilson $ $ $ $
---------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amounts shown in this column are based on the Fund's fiscal year ended
November 30, 2000.
(2) The amounts reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 109 Vanguard funds (107
in the case of Mr. Malkiel; 99 in the case of Mr. MacLaury) for the 2000
calendar year.
(3) Mr. Ellis joined the Fund's board, effective January 1, 2001.
B-7
<PAGE>
INVESTMENT ADVISORY SERVICES
The Fund has entered into an investment advisory agreement with Oaktree Capital
Management, LLC, a registered investment adviser under the Investment Advisers
Act of 1940, as amended, (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.
The Adjustment will be calculated as follows, using data from the table
below:
PERFORMANCE FEE
CUMULATIVE PERFORMANCE OF THE FUND ADJUSTMENT AS A
VS. THE INDEX FOR THE RELEVANT PERIOD PERCENTAGE OF
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.
B-8
<PAGE>
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.
During the fiscal years ended November 30, 1998, 1999, and 2000, the Fund
incurred the following investment advisory fees:
1998 1999 2000
---- ---- ----
Basic Fee................... $770,000 $695,000 $.,000
Increase or Decrease for Performa (3,000) (369,000) (.,000)
Adjustment.................. ------- --------- -------
Total $767,000 $326,000 $.,000
The Fund's current agreement with its adviser is renewable for successive
one-year periods if (1) the agreement is 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, cast in person at a meeting called
for the purpose of considering such approval or (2) the agreement is
specifically approved by a vote of a majority of the Fund's outstanding voting
securities. 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 sixty (60) days' written notice to Oaktree, (2) by a vote of a
majority of the Fund's outstanding voting securities, or (3) by Oaktree upon 90
-- days' written notice to the Fund.
B-9
<PAGE>
DESCRIPTION OF OAKTREE
Oaktree specializes in selected niche investment markets. The founders of
Oaktree formed the company in April 1995 after having managed convertible
securities, distressed debt, distressed real-estate activities, principal
investments 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, 2000,
Oaktree managed approximately $. 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, as amended, 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 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, 1998, 1999, and 2000, the Fund
paid $72,951, $51,858, and $. 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 in its
discretion. 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.
B-10
<PAGE>
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth in
the Prospectus:
CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that
combine the investment characteristics of bonds and common stocks. Convertible
securities typically consist of debt securities or preferred stock that may be
converted within a specified period of time (normally for the entire life of the
security) into a certain amount of common stock or other equity security of the
same or a different issuer at a predetermined price. They also include debt
securities with warrants or common stock attached and derivatives combining the
features of debt securities and equity securities. Convertible securities
entitle the holder to receive interest paid or accrued on debt, or dividends
paid or accrued on preferred stock, until the security matures or is redeemed,
converted, or exchanged. Convertibles are often rated below investment grade or
are not rated, and therefore may be considered speculative investments.
MARKET VALUE OF CONVERTIBLE SECURITIES. The market value of a convertible
security is a function of its "investment value" and its "conversion value." A
security's "investment value" represents the value of the security without its
conversion feature (i.e., a nonconvertible fixed income security). The
investment value may be determined by reference to its credit quality and the
current value of its yield to maturity or probable call date. At any given time,
investment value is dependent upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer's capital structure.
A security's "conversion value" is determined by multiplying the number of
shares the holder is entitled to receive upon conversion or exchange by the
current price of the underlying security. If the conversion value of a
convertible security is significantly below its investment value, the
convertible security will trade like nonconvertible debt or preferred stock and
its market value will not be influenced greatly by fluctuations in the market
price of the underlying security. Instead, the convertible security takes on the
characteristics of a bond, and its price moves in the opposite direction of
interest rates. Conversely, if the conversion value of a convertible security is
near or above its investment value, the market value of the convertible security
will be more heavily influenced by fluctuations in the market price of the
underlying security. In that case, the convertible security's price may be as
volatile as that of common stock. Because both interest rate and market
movements can influence its value, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
MANDATORY CONVERSION SECURITIES. The Fund's investments in convertible
securities may at times include securities that have a mandatory conversion
feature, pursuant to which the securities convert automatically into common
stock or other equity securities (of the same or a different issuer) at a
specified date and a specified conversion ratio, or that are convertible at the
option of the issuer. For issues where conversion of the security is not at the
option of the holder, the Fund may be required to convert the security into the
underlying common stock even at times when the value of the underlying common
stock or other equity security has declined substantially. Unlike more
traditional convertible securities, some mandatory conversion securities have an
adjustable conversion ratio. In addition, somey of these securities may limit
for capital appreciation and, in some instances, are subject to unlimited
potential for loss of capital. These securities are designed and marketed
principally by major investment banking firms and trade in the marketplace under
various acronyms that are proprietary to the investment banking firm. The Fund
may be exposed to counterparty credit risk to the extent it invests in synthetic
mandatory conversion securities which are issued by investment banking firms.
Those are unsecured obligations of the issuing firm. Should the firm that issued
the security experience financial difficulty, its ability to perform according
to the terms of the security might become impaired. The Fund's investments in
convertible securities, particularly securities that are convertible into
securities of an issuer other than the issuer of the convertible security, may
be illiquid. The Fund may not be able to dispose of such securities in a timely
fashion or for a fair price, which could result in losses to the Fund.
B-11
<PAGE>
CONVERTIBLE PREFERRED STOCK. The Fund may invest in preferred stock that
includes a conversion feature known as a convertible preferred security.
Preferred stock, unlike common stock, has a stated dividend rate payable from
the corporation's earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. "Cumulative" dividend provisions
require all or a portion of prior unpaid dividends to be paid before dividends
can be paid to the issuer's common stock. "Participating" preferred stock may be
entitled to a dividend exceeding the stated dividend in certain cases. If
interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred stock
may have mandatory sinking fund provisions, as well as provisions allowing the
stock to be called or redeemed prior to its maturity, which can have a negative
impact on the stock's price when interest rates decline. Preferred stock
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation. The rights
of preferred stock on distribution of a corporation's assets in the event of a
liquidation are generally subordinate to the rights associated with a
corporation's debt securities. While preferred stock is an equity security, all
convertible preferred securities have characteristics of both a debt security
and a call option. Typically these securities are convertible into common stock
after a three-year period (although they are callable by the issuer prior to
conversion). They pay a cumulative, fixed dividend that is senior to, and
expected to be in excess of, the dividends paid on the common stock of the same
issuer. Convertible preferred stock offers limited opportunity for appreciation,
however, because of a call feature. If the market value of the issuer's common
stock increases to or above the call price of the preferred securities the
issuer can (and would be expected to) call the convertible preferred security
for redemption at the call price. Convertible preferred securities are also
subject to credit risk of the issuer as to its ability to pay the dividend.
Generally, convertible preferred stock is less volatile than the related common
stock of the issuer, in part because of the fixed dividend.
ENHANCED AND EQUITY-LINKED CONVERTIBLES. The Fund's investment in
convertible securities may include securities with enhanced convertible features
or "equity-linked" features. Equity-linked securities come in many forms and may
include features, among others, such as the following: (i) may be issued by the
issuer of the underlying equity security or by a company other than the one to
which the instrument is linked (usually an investment bank), (ii) may convert
into equity securities, such as common stock, within a stated period from the
issue date or may be exchanged for cash or some combination of cash and the
linked security at a value based upon the value of the linked equity security
within a stated period from the issue date, (iii) may have various conversion
features prior to maturity at the option of the holder or the issuer or both,
(iv) may limit the appreciation value with caps or collars of the value of the
linked equity security, and (v) may have fixed, variable or no interest payments
during the life of the security which reflect the actual or a structured return
relative to the underlying dividends of the linked equity security. Some
equity-linked securities have a principal amount at maturity that depends upon
the performance of a specified equity security. Such equity-linked securities
are a form of derivative security and differ from ordinary debt securities in
that the principal amount received at maturity may not be fixed. Instead, their
principal value is based on the price of the linked equity security at the time
the security matures. There may be additional types of convertible securities
with features not specifically referred to herein in which the Fund may invest
consistent with its investment objective and policies. Investments in enhanced
and equity-linked securities may subject the Fund to additional risks not
ordinarily associated with investments in other convertible securities. (Because
these securities are sometimes issued by a third party other than the issuer of
the linked security, the Fund is subject to risks if the underlying stock
underperforms and if the issuer defaults on the payment of the dividend or the
common stock at maturity.) In addition, the trading market for particular
enhanced or equity-linked securities may be less liquid, making it difficult for
the Fund to dispose of a particular security when necessary and reduced
liquidity in the secondary market for any such securities may make it more
difficult to obtain market quotations for valuing the Fund's portfolio.
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 investments while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
B-12
<PAGE>
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 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
B-13
<PAGE>
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.
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
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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 U.S. 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 more volatile
than securities of comparable U.S. 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.
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<PAGE>
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, as
amended, (the 1933 Act) or securities that are exempt from registration under
the 1933 Act, such as commercial paper. 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.
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, the adviser believes that they can be controlled
through careful monitoring procedures.
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<PAGE>
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 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
so long as the exemptive order is in effect and not revoked. 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.
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<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 2000, including
the financial highlights for each of the five fiscal years in the period ended
November 30, 2000, appearing in the Fund's 2000 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, 2000 was *%.
The Fund's average annual total return for the one-, five-, and ten-year
periods ended November 30, 2000, was *%, *%, and *%, 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
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.
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<PAGE>
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
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 p.m. Eastern time, on each day that the Exchange is open
for trading.
B-19
<PAGE>
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 or the official closing 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.
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 TOTAL MARKET 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 COMPLETION 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.
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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 BROTHERS 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 CREDIT BOND INDEX--is a subset of the Lehman Credit 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.
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 Brothers Long
Credit A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long Credit A 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 BROTHERS LONG CREDIT A 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/CREDIT 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/CREDIT 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/CREDIT 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.
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LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) U.S. CREDIT 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) U.S. CREDIT 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 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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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.
B-23
<PAGE>
SAI082 032001
B-24
<PAGE>
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) Rule 18f-3 Plan*
(p) Code of Ethics*
* Filed herewith
** Previously filed
+To be filed by amendment
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).
C-1
<PAGE>
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
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it 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 16th day of January, 2001.
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 January 16, 2001
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ CHARLES D ELLIS Trustee January 16, 2001
---------------------------
(Heidi Stam)
Charles D. Ellis*
By:/S/ JOANN HEFFERNAN HEISEN Trustee January 16, 2001
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee January 16, 2001
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee January 16, 2001
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee January 16, 2001
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JAMES O. WELCH, JR. Trustee January 16, 2001
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee January 16, 2001
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal January 16, 2001
---------------------------Financial Officer and Principal
(Heidi Stam) 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
Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . Ex-99.BO
Code of Ethics. . . . . . . . . . . . . . . . . . . . .Ex-99.BP
