UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-4627
Name of Registrant: Vanguard Convertible Securities Fund
Address of Registrant: P.O. Box 2600
Valley Forge, PA 19482
Name and address of agent for service: R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482
Registrant's telephone number, including area code: (610) 669-1000
Date of fiscal year end: November 30
Date of reporting period: December 1, 2002 - May 31, 2003
Item 1: Reports to Shareholders
Vanguard(R) Convertible Securities Fund
Semiannual Report
May 31, 2003
THE VANGUARD GROUP
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
SUMMARY
* The Convertible Securities Fund returned 12.1% during the first half of its
2003 fiscal year.
* The fund's return surpassed that of its average competitor, but lagged the
performance of its benchmark index.
* The fund's strongest-performing holdings were in the beaten-down technology
and telecommunications sectors, while its weakest were consumer
discretionary issues.
CONTENTS
1 Letter from the Chairman
5 Report from the Adviser
8 Fund Profile
9 Glossary of Investment Terms
11 Performance Summary
12 Financial Statements
20 Advantages of Vanguard.com
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LETTER FROM THE CHAIRMAN [PICTURE OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Fellow Shareholder,
Vanguard Convertible Securities Fund registered an impressive turnaround during
the first half of its 2003 fiscal year, returning 12.1%. This result followed a
difficult fiscal 2002 in which the fund declined -8.9%. For the six months ended
May 31, 2003, the fund outpaced both the broad U.S. stock and bond markets--as
measured by the Wilshire 5000 Total Market Index and Lehman Brothers Aggregate
Bond Index, respectively--by nearly a two-to-one margin. Investors demonstrated
a renewed appetite for risk in the period, as they bid up the prices of
corporate bonds, particularly lower-rated issues--the domain of many convertible
securities. The fund's return outpaced that of its average mutual fund
competitor, but fell somewhat short of the performance of its benchmark index
due to the fund's underweight positions in some of the index's strongest
performers.
- --------------------------------------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
MAY 31, 2003
- --------------------------------------------------------------------------------
Vanguard Convertible Securities Fund 12.1%
Average Convertible Securities Fund* 11.0
CS First Boston Convertibles Index 13.3
Wilshire 5000 Index 5.1
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*Derived from data provided by Lipper Inc.
The table above presents the fund's return, along with those of the average
convertible securities fund, the Credit Suisse First Boston Convertible
Securities Index, and the Wilshire 5000 Index. Details of the fund's
performance, including changes in its net asset value and per-share distribution
amounts, can be found on page 4. The fund's yield on May 31, 2003, was 3.91%, 18
basis points (0.18 percentage point) lower than its yield on November 30, 2002.
STOCKS LEAPED FORWARD AFTER A WEAK START
U.S. stocks initially drifted lower during the six-month period, but began a
rally at the start of the Iraqi war in mid-March that continued through the end
of May. The overall U.S. stock market, as measured by the Wilshire 5000 Index,
gained 5.1%: A loss of 9.5% during the first three months of the period was
followed by a return of 16.1% in the next three months. Fueling this advance was
the swift and successful conclusion of the war as well as the continued strength
of consumer spending and the residential housing market. However, the job market
and manufacturing data showed ongoing signs of weakness.
1
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MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED MAY 31, 2003
--------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
Russell 1000 Index (Large-caps) 4.6% -7.7% -0.8%
Russell 2000 Index (Small-caps) 9.3 -8.2 0.6
Wilshire 5000 Index (Entire market) 5.1 -7.2 -0.9
MSCI All Country World Index Free
ex USA (International) 4.6 -10.8 -3.4
- --------------------------------------------------------------------------------
Lehman Aggregate Bond Index 6.3% 11.6% 7.8%
(Broad taxable market)
Lehman Municipal Bond Index 6.5 10.4 6.5
Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0
================================================================================
Consumer Price Index 1.2% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
Overall, the returns of small-capitalization stocks, as represented by the
Russell 2000 Index, outpaced those of the large-cap stocks in the Russell 1000
Index. Across the market-cap spectrum, value stocks (those that generally trade
at below-market valuations relative to their book values) produced returns that
were modestly better than the results of growth stocks (those expected to
produce above- average earnings growth).
International equity markets were mixed. Pacific markets--particularly
Japan--experienced poor results, while European and most non-Asian emerging
markets produced respectable returns when measured in U.S. dollars.
INTEREST RATES CONTINUED THEIR DOWNWARD MARCH
The U.S. bond markets generated strong results. The Lehman Aggregate Bond Index,
a proxy for the broad investment-grade bond market, returned 6.3%. Bond prices
rose as interest rates declined even further from the 40-year lows at which they
began the period. At the short-term end of the fixed income maturity range, the
yield of the 3-month U.S. Treasury bill--a fair proxy for money market
yields--fell 11 basis points (0.11 percentage point) during the six months to
1.10%. Longer-term interest rates followed suit, as the yield of the 10-year
Treasury note approached an all-time low, declining 84 basis points (0.84
percentage point) to 3.37%.
The performance of corporate bonds was especially strong. Across all
maturities, corporate debt outperformed Treasuries. And the riskiest of bonds
carried the biggest rewards during the six months. The Lehman High Yield Index,
which tracks the performance of bonds that are issued by companies with low
credit ratings, returned 16.8% for the period.
- ----------------------
Corporate bonds
enjoyed particularly
solid performance,
outpacing Treasuries
across all maturities.
- ----------------------
2
----------------------
Buoyed by strong
equity markets,
the fund achieved
its strongest
six- month
result in
over three years.
----------------------
A PROFITABLE PERIOD PUNCTUATED BY SOLID SECURITY SELECTION
Buoyed by the strong performance of the equity markets in this period, the
Convertible Securities Fund--which holds securities that are a hybrid of stocks
and bonds--achieved its best six-month result in more than three years.
During the six months, investors showed that they were once again willing
to take greater risk in search of returns, bidding up many of the lower-rated
securities that populate the convertibles universe. Your fund's technology
holdings, which had been among its poorest-performing securities in the recent
past, experienced a resurgence. Indeed, a number of companies found the
environment conducive to issuing new convertibles to secure financing. At the
other extreme, the fund's consumer discretionary holdings--one of its largest
sectors, on average--were poor performers for the fund, as well as for
convertible investors in general.
Although convertible securities represent a very small portion of the
investment universe, the fund's adviser, Oaktree Capital Management, strives to
maintain broad diversification across sectors and industries. Oaktree seeks to
capitalize on the returns of convertible securities that have an imbalance
between upside potential and downside risk. Within this context, the adviser
succeeded in making solid security picks during the past six months. More
details about the fund's strategy and performance are in the Report from the
Adviser on page 5.
The fund has earned respectable returns in the past, and we have confidence
in its ability to continue to do so over the long run. This confidence stems not
only from the demonstrated talents of the adviser but also from our low-cost
advantage. The fund's annualized expense ratio (operating expenses as a
percentage of average net assets) of 0.92%, or $9.20 per $1,000 invested, is a
little less than two-thirds the 1.49% ($14.90 per $1,000 invested) charged by
the average peer fund. Over time, this cost advantage allows you to keep more of
the fund's gross returns in your account, where they can continue working for
you.
A SIMPLE STRATEGY FOR LONG-TERM SUCCESS
The stock and bond markets' constant up-and-down movements are unpredictable to
even the most knowledgeable investor. However, the best way to weather this
day-to-day volatility is to choose a mix of stock, bond, and money market funds
that is consistent with your unique circumstances and goals, and then sit tight.
3
As part of your long-term assets, Vanguard Convertible Securities Fund can play
an important role. Because it shares some characteristics of both stocks
(potential for capital appreciation) and bonds (potential for income), it
provides diversification that can aid your efforts to balance risk and return in
your portfolio. We thank you for your continuing confidence and for entrusting
your hard-earned assets to us.
Sincerely,
/S/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
June 12, 2003
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YOUR FUND'S PERFORMANCE AT A GLANCE NOVEMBER 30, 2002-MAY 31, 2003
DISTRIBUTIONS PER SHARE
------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Convertible Securities Fund $10.57 $11.61 $0.22 $0.00
- --------------------------------------------------------------------------------
4
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REPORT FROM THE ADVISER
Your investment in Vanguard Convertible Securities Fund produced strong absolute
and good relative performance in the first six months of the fund's 2003 fiscal
year. During this period, the fund outperformed most of the well-known equity
and bond market indexes. However, the fund's significant outperformance versus
common stocks should be considered unusual as convertible securities normally
lag in a short-term equity advance.
The fund's 12.1% return for the period was slightly below that of its
primary index, the CS First Boston Convertibles Index (13.3%), but well ahead of
the Goldman Sachs/Bloomberg US Convertible 100 Index (8.7%), another widely
followed convertibles benchmark. The fund's performance benefited from two
important factors. First, there was a dramatic tightening in credit spreads
within the fixed income market--that is, the difference between the yields of
corporate and government securities with the same maturities became smaller.
Second, the fund offered a relatively high level of current yield.
THE INVESTMENT ENVIRONMENT
The investment environment for the first six months of fiscal 2003 was, in many
ways, opposite from that in the last six months of fiscal 2002. While the prior
period was generally characterized by rampant pessimism and a focus on the
negative investing factors, the first several months of 2003 were characterized
by increasing optimism, which pushed equity prices substantially higher and
drove interest rates to new 40-year lows. This dramatic reversal of investor
sentiment occurred in an unusually short period.
The strongest influence on the convertible securities market was the sharp
contraction in credit spreads, which gave a tremendous boost to the fixed income
component of convertibles. We believe this occurred for a number of reasons:
positive changes in corporate governance; corporations' working to improve their
balance sheets; and managements' focusing on cutting costs rather than on
investing for growth. In addition, many assets were written down, equity was
issued, noncore assets were or are in the process of being sold, and debt
maturities were extended. Of course, the retrenchment
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INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved by investing in a broadly diversified group of
convertible securities that provide attractive combinations of current income
and potential for price appreciation from their convertibility into common
stock.
- --------------------------------------------------------------------------------
5
of spending has potentially negative implications for future corporate earnings,
but, nevertheless, these structural factors were very helpful in changing the
psychology of investors in the fiscal half-year.
The tightening of credit spreads had the greatest impact on speculative-grade
issues, with these securities far outperforming the investment-grade portion of
the market. Leading the pack of top performers for the period were convertibles
from Lucent Technologies, Calpine, Nortel Networks, and Corning, as well as
other beaten-down technology and telecommunications issues. Despite a very
lackluster fundamental environment, the technology sector was, far and away, the
biggest contributor to the CS First Boston Convertibles Index's return. The
weakest performers in the convertibles market were generally issues in the
consumer discretionary sector. Among the largest losers were Fleming Companies
and HealthSouth. The HealthSouth bonds were quite a debacle, dropping from 99.50
to 15.00 (i.e., $995 to $150 on a $1,000 issue) just two weeks before they were
scheduled to mature at par. Fortunately, we did not own either of these issues.
The demand for convertibles remains strong, as a wide variety of investors
are drawn to their performance characteristics. At this time, demand continues
to exceed supply, and we are seeing prices of many existing issues rise
significantly when a large buyer enters the market. Scarcity value is playing a
major role in generating unprecedented demand for newly issued convertibles. In
fact, many new deals are being accelerated in their timing and/or upsized from
their original amounts. One of the factors that has boosted demand for
convertibles is the reemergence of closed-end funds that invest in combinations
of convertible securities, straight preferred stocks, and high-yield bonds.
Several of these yield-oriented funds have been formed over the past few months,
raising approximately $3 billion.
THE FUND'S SUCCESSES
The tightening of credit spreads, noted earlier, helped the fund's performance.
However, the impact was limited by our usual focus on balanced, or total return,
convertibles. As you know, we typically sell convertibles when they become pure
"bond substitutes," and this practice restrained the impact of spread tightening
on our portfolio. Some of our top performers were EchoStar Communications,
Nextel Communications, Teva Pharmaceutical Industries, and Allergan. Other
relatively strong performers were Gilead Sciences, UTStarcom, and Titan. There
were no significant underperforming securities or credit concerns in the
portfolio.
6
THE FUND'S SHORTFALLS
While we were pleased with our return for the period, we did slightly
underperform our benchmark index. This was due to our underweighting in
depressed tech and telecom issues--which, in spite of their very high conversion
premiums, were very strong performers as a result of the credit-spread
rally--and the fact that we didn't hold certain securities that were
above-average performers in the CS First Boston Convertibles Index. This
included the index's largest holding, the Ford Motor 6.50% convertible
preferred, which performed well during the period. We also chose not to invest
in Gap, another large holding of the index that performed relatively well. The
recovery in the fundamentals of Gap was stronger than we had anticipated.
OUR POSITION
Although the terms of new issues are generally becoming less alluring, we are
finding selective new issues attractive and numerous investment opportunities in
the secondary market. We remain fully invested and believe our portfolio's
downside protection qualities remain intact, with a current mix of approximately
82% convertible bonds and 18% convertible preferred securities. This downside
protection is also a function of our above-average conversion premiums, which,
of course, could restrain our near-term gains if the equity market continues to
advance. Overall, we remain positive about the current investing environment and
believe the fund is well positioned to achieve its objectives.
Larry Keele,
Portfolio Manager Oaktree Capital Management,
LLC June 17, 2003
7
- --------------------------------------------------------------------------------
Fund Profile As of May 31, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with a broad market index. Key terms are defined on pages 9-10.
Convertible Securities Fund
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Number of Securities 92
Yield 3.9%
Conversion Premium 56.5%
Average Weighted Maturity 4.5 years
Average Coupon 3.8%
Average Quality BB
Average Duration 3.3 years
Foreign Holdings 14.3%
Turnover Rate 107%*
Expense Ratio 0.92%*
Cash Investments 4.1%
- -----------------------------------------------------------
- -----------------------------------------------------------
VOLATILITY MEASURES
Wilshire
Fund 5000
- -----------------------------------------------------------
R-Squared 0.69 1.00
Beta 0.66 1.00
- -----------------------------------------------------------
- -----------------------------------------------------------
Distribution by Maturity (% of bonds)
Under 1 Year 2.9%
1-5 Years 63.8
5-10 Years 33.3
10-20 Years 0.0
20-30 Years 0.0
Over 30 Years 0.0
- -----------------------------------------------------------
Total 100.0%
- -----------------------------------------------------------
Distribution by Credit Quality (% of bonds)
Aaa/AAA 0.8%
Aa/AA 0.0
A/A 3.0
Baa/BBB 15.1
Ba/BB 21.4
B/B 36.5
Below B/B 8.1
Not Rated 15.1
- -----------------------------------------------------------
Total 100.0%
- -----------------------------------------------------------
Ten Largest Holdings (% of total net assets)
Tyco International Group SA 4.4%
(conglomerate)
EchoStar Communications Inc. 4.1
(telecommunications)
Nextel Communications, Inc. 3.9
(telecommunications)
Sealed Air Corp. 3.6
(manufacturing)
Freeport-McMoRan Copper & Gold, Inc. 3.3
(metals and mining)
Teva Pharmaceutical Industries, Ltd. 3.0
(pharmaceuticals)
Service Corp. International 2.9
(diversified services)
Nortel Networks Corp. 2.8
(telecommunications)
Liberty Media Corp. 2.6
(media)
Calpine Corp. 2.5
(utilities)
- -----------------------------------------------------------
Top Ten 33.1%
- -----------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
*Annualized
Visit our website at
www.vanguard.com
for regularly updated fund information.
Sector Diversification table is on the next page.
8
Fund Profile (continued)
- -----------------------------------------------------------
Sector Diversification (% of portfolio)
Auto & Transportation 8.5%
Consumer Discretionary 20.7
Consumer Staples 1.3
Financial Services 6.8
Health Care 13.7
Integrated Oils 0.0
Other Energy 1.3
Materials & Processing 9.2
Producer Durables 9.4
Technology 19.5
Utilities 5.5
- -----------------------------------------------------------
Cash Investments 4.1%
- -----------------------------------------------------------
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Glossary of Investment Terms
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
- --------------------------------------------------------------------------------
AVERAGE DURATION. An estimate of how much a fund's share price will fluctuate in
response to a change in interest rates. To see how the price could shift,
multiply the fund's duration by the change in rates. If interest rates rise by
one percentage point, the share price of a fund with an average duration of five
years would decline by about 5%. If rates decrease by a percentage point, the
fund's share price would rise by 5%.
- --------------------------------------------------------------------------------
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's holdings by credit-rating agencies. The agencies
make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers.
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AVERAGE WEIGHTED MATURITY. The average length of time until securities held by a
fund reach maturity (or are called) and are repaid. In general, the longer the
average weighted maturity, the more a fund's share price will fluctuate in
response to changes in market interest rates.
- --------------------------------------------------------------------------------
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a comparative index and an overall market
index. Each index is assigned a beta of 1.00. Compared with a given index, a
fund with a beta of 1.20 typically would have seen its share price rise or fall
by 12% when the index rose or fell by 10%. However, a fund's beta should be
reviewed in conjunction with its R-squared (see definition below). The lower the
R-squared, the less correlation there is between the fund and the benchmark, and
the less reliable beta is as an indicator of volatility.
- --------------------------------------------------------------------------------
9
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
- --------------------------------------------------------------------------------
CONVERSION PREMIUM. The average percentage by which the weighted average market
price of the convertible securities held by a fund exceeds the weighted average
market price of their underlying common stocks. For example, if a stock is
trading at $25 per share and a bond convertible into the stock is trading at a
price equivalent to $30 per share of stock, the conversion premium is 20%
($54$25=20%).
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EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
- --------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's net assets represented by
securities of companies based outside the United States.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by an overall market index.
If a fund's total returns were precisely synchronized with an index's returns,
its R-squared would be 1.00. If the fund's returns bore no relationship to the
index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
- --------------------------------------------------------------------------------
Yield. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
- --------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
Performance Summary As of May 31, 2003
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
CONVERTIBLE SECURITIES FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) NOVEMBER 30, 1992-MAY 31, 2003
FISCAL YEAR CONVERTIBLE SECURITIES FUND FIRST BOSTON CONVERTIBLES INDEX
1993 13.9% 19.2%
1994 -4.4 -3.9
1995 17.1 24.0
1996 14.9 15.3
1997 14.8 15.4
1998 -2.2 1.4
1999 24.8 30.6
2000 5.3 1.5
2001 4.0 -3.6
2002 -8.9 -5.9
2003* 12.1 13.3
- --------------------------------------------------------------------------------
*Six months ended May 31, 2003.
Note: See Financial Highlights table on page 17 for dividend and capital gains
information.
Average Annual Total Returns for periods ended March 31, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE ------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Convertible Securities Fund 6/17/1986 -3.81% 2.29% 2.58 4.52% 7.10%
- --------------------------------------------------------------------------------
11
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FINANCIAL STATEMENTS May 31, 2003 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
Face Market
Amount Value*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS (78.3%)
- --------------------------------------------------------------------------------
Auto & Transportation (7.6%)
AirTran Holdings, Inc.
(1) 7.00%, 7/1/2023 $ 2,300 2,622
Continental Airlines, Inc.
4.50%, 2/1/2007 15,900 11,309
General Motors Corp.
4.50%, 3/6/2032 192 4,783
Navistar Financial Corp.
4.75%, 4/1/2009 8,370 7,669
Navistar International Corp.
(1) 2.50%, 12/15/2007 7,295 8,608
2.50%, 12/15/2007 1,635 1,929
United Parcel Service, Inc.
1.75%, 9/27/2007 4,050 4,101
--------
41,021
--------
Consumer Discretionary (17.0%)
Avon Products, Inc.
0.00%, 7/12/2020 7,865 4,257
EchoStar Communications Inc.
(1) 5.75%, 5/15/2008 740 793
5.75%, 5/15/2008 19,840 21,263
Global Imaging Systems, Inc.
(1) 4.00%, 11/15/2008 350 392
IKON Office Solutions, Inc.
(1) 5.00%, 5/1/2007 2,600 2,574
Lamar Advertising Co.
5.25%, 9/15/2006 1,800 1,834
Liberty Media Corp.
(1) 0.75%, 3/30/2023 12,235 13,810
J.C. Penney & Co., Inc.
5.00%, 10/15/2008 $ 4,550 4,533
The Pep Boys (Manny, Moe & Jack)
(1) 4.25%, 6/1/2007 855 795
Royal Caribbean Cruises Ltd.
0.00%, 5/18/2021 13,733 6,180
Service Corp. International
6.75%, 6/22/2008 14,750 15,414
Triarc Cos., Inc.
(1) 5.00%, 5/15/2023 9,610 10,187
Waste Connections, Inc.
(1) 5.50%, 4/15/2006 3,255 3,747
5.50%, 4/15/2006 2,740 3,154
XM Satellite Radio Holdings Inc.
7.75%, 3/1/2006 2,458 2,925 --------
91,858
--------
CONSUMER STAPLES (1.3%)
NCO Group, Inc.
4.75%, 4/15/2006 6,000 5,993
Performance Food Group Co.
5.50%, 10/16/2008 915 1,187
--------
7,180
--------
FINANCIAL SERVICES (0.9%)
Providian Financial Corp.
3.25%, 8/15/2005 5,000 4,600
--------
Health Care (13.7%)
Allergan, Inc.
(1) 0.00%, 11/6/2022 4,335 4,172
0.00%, 11/6/2022 2,500 2,406
12
- --------------------------------------------------------------------------------
Face Market
Amount Value*
(000) (000)
- --------------------------------------------------------------------------------
Axcan Pharma Inc.
(1) 4.25%, 4/15/2008 $ 7,400 9,296
Celgene Corp.
(1) 1.75%, 6/1/2008 3,410 3,495
Cephalon, Inc.
5.25%, 5/1/2006 640 663
DaVita Inc.
7.00%, 5/15/2009 1,955 2,045
Gilead Sciences, Inc.
(1) 2.00%, 12/15/2007 8,115 10,671
Health Management Assoc.
0.25%, 8/16/2020 2,500 1,628
Ivax Corp.
5.50%, 5/15/2007 3,425 3,438
Sunrise Assisted Living, Inc.
(1) 5.25%, 2/1/2009 1,570 1,617
5.25%, 2/1/2009 8,725 8,987
Teva Pharmaceutical Industries, Ltd.
0.75%, 8/15/2021 12,825 16,127
Total Renal Care Holdings
5.625%, 7/15/2006 1,660 1,745
Universal Health Services, Inc.
(1) 0.426%, 6/23/2020 10,005 6,341
0.426%, 6/23/2020 2,290 1,451
--------
74,082
--------
OTHER ENERGY (1.0%)
Pride International, Inc.
(1) 2.50%, 3/1/2007 4,020 5,241
--------
MATERIALS & Processing (4.1%)
Freeport-McMoRan Copper & Gold, Inc.
(1) 7.00%, 2/11/2011 6,160 7,330
7.00%, 2/11/2011 1,900 2,261
Inco Ltd.
0.00%, 3/29/2021 18,401 12,444
--------
22,035
--------
PRODUCER DURABLES (8.6%)
ARRIS Group, Inc.
(1) 4.50%, 3/15/2008 2,510 3,316
Briggs & Stratton Corp.
(1) 5.00%, 5/15/2006 1,705 1,929
5.00%, 5/15/2006 5,870 6,640
DuPont Photomasks, Inc.
(1) 1.25%, 5/15/2008 3,030 3,254
Photronics, Inc.
(1) 2.25%, 4/15/2008 4,650 6,196
4.75%, 12/15/2006 1,470 1,424
Tyco International Group SA
(1) 2.75%, 1/15/2018 22,160 23,799
--------
46,558
- --------------------------------------------------------------------------------
Face Market
Amount Value*
(000) (000)
- --------------------------------------------------------------------------------
TECHNOLOGY (19.5%)
Acxiom Corp.
(1) 3.75%, 2/15/2009 $ 2,200 2,483
3.75%, 2/15/2009 4,280 4,831
Anixter International, Inc.
0.00%, 6/28/2020 2,020 657
Benchmark Electronics, Inc.
6.00%, 8/15/2006 3,940 4,088
Checkpoint Systems, Inc.
5.25%, 11/1/2005 2,577 2,587
Corning, Inc.
3.50%, 11/1/2008 11,000 12,169
Documentum, Inc.
(1) 4.50%, 4/1/2007 3,760 4,131
EDO Corp.
(1) 5.25%, 4/15/2007 745 740
5.25%, 4/15/2007 1,000 994
General Semiconductor Corp.
5.75%, 12/15/2006 1,315 1,336
HNC Software, Inc.
(1) 5.25%, 9/1/2008 2,005 2,459
Hutchinson Technology, Inc.
(1) 2.25%, 3/15/2010 1,520 1,856
Lucent Technologies, Inc.
2.75%, 6/15/2023 4,900 4,936
MSC.Software Corp.
(1) 2.50%, 5/5/2008 4,145 4,394
Micron Technology, Inc.
(1) 2.50%, 2/1/2010 8,250 9,900
Network Associates, Inc.
5.25%, 8/15/2006 6,415 7,065
Nextel Communications, Inc.
4.75%, 7/1/2007 1,355 1,333
6.00%, 6/1/2011 18,960 19,813
Nortel Networks Corp.
4.25%, 9/1/2008 17,650 15,135
UTStarcom, Inc.
(1) 0.875%, 3/1/2008 2,865 4,118
--------
105,025
--------
Utilities (4.6%)
Calpine Corp.
4.00%, 12/26/2006 16,560 13,352
Mediacom Communications Corp.
5.25%, 7/1/2006 5,250 4,902
Mirant Corp.
5.75%, 7/15/2007 2,145 1,662
Nextel Partners, Inc.
(1) 1.50%, 11/15/2008 5,035 5,098
--------
25,014
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $386,103) 422,614
- --------------------------------------------------------------------------------
13
Face Market
Amount Value*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (17.6%)
- --------------------------------------------------------------------------------
Auto & Transportation (0.9%)
Kansas City Southern
(1) 4.25% Cvt. Pfd. 2,200 1,168
Union Pacific
6.25% Cvt. Pfd. 73,257 3,773
--------
4,941
--------
CONSUMER DISCRETIONARY (3.6%)
Allied Waste Industries, Inc.
6.25% Cvt. Pfd. 151,900 8,962
Host Marriott Corp.
6.75% Cvt. Pfd. 85,000 3,506
Newell Rubbermaid
5.25% Cvt. Pfd. 37,322 1,782
Radio One, Inc.
6.50% Cvt. Pfd. 5,000 5,219
--------
19,469
--------
FINANCIAL SERVICES (6.0%)
Commerce Capital Trust II
5.95% Cvt. Pfd. 61,600 3,326
(1) 5.95% Cvt. Pfd. 76,400 4,126
New York Community Bancorp
6.00% Cvt. Pfd. 94,900 5,789
Reinsurance Group of America, Inc.
5.75% Cvt. Pfd. 100,000 5,415
United Rentals
6.50% Cvt. Pfd. 197,800 6,799
Washington Mutual, Inc.
(1) 5.375% Cvt. Pfd. 118,100 6,850
--------
2,305
--------
OTHER ENERGY (0.3%)
Williams Cos., Inc.
(1) 5.50% Cvt. Pfd. 31,700 1,696
--------
MATERIALS & PROCESSING (5.1%)
Freeport-McMoRan Copper & Gold, Inc.
7.00% Cvt. Pfd. 330,100 8,055
Sealed Air Corp.
$2.00 Cvt. Pfd. 397,900 19,617
--------
27,672
--------
Producer Durables (0.8%)
Northrop Grumman Corp.
7.00% Cvt. Pfd. 33,100 4,064
Utilities (0.9%)
Dominion Resources, Inc.
9.50% Cvt. Pfd. 81,100 4,724
--------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $85,030) 94,871
- --------------------------------------------------------------------------------
Face Market
Amount Value*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (13.7%)
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.33%, 6/2/2003 $26,204 $26,204
1.33%, 6/2/2003--Note G 47,765 47,765
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $73,969) 73,969
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (109.6%)
(Cost $545,102) 591,454
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-9.6%)
- --------------------------------------------------------------------------------
Other Assets--Note C 9,157
Security Lending Collateral
Payable to Brokers--Note G (47,765)
Other Liabilities (13,265)
--------
(51,873)
--------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 46,473,313 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $539,581
================================================================================
NET ASSET VALUE PER SHARE $11.61
================================================================================
*See Note A in Notes to Financial Statements.
(1)Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At May 31, 2003, the aggregate value
of these securities was $179,204,000, representing 33.2% of net assets.
- --------------------------------------------------------------------------------
AT MAY 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
- --------------------------------------------------------------------------------
Paid-in Capital $565,27 $12.16
Undistributed Net
Investment Income 2,766 06
Accumulated
Realized Losses (74,810) 1.61
Unrealized Appreciation 46,3521 1.00
- --------------------------------------------------------------------------------
NET ASSETS $539,58$ 11.61
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
14
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to the fund. These expenses
directly reduce the amount of investment income available to pay to shareholders
as income dividends. This Statement also shows any Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
Convertible Securities Fund
Six Months Ended May 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends $ 2,269
Interest 6,538
Security Lending 40
- --------------------------------------------------------------------------------
Total Income 8,847
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 763
Performance Adjustment 317
The Vanguard Group--Note C
Management and Administrative 592
Marketing and Distribution 20
Custodian Fees 7
Shareholders' Reports and Proxies 18
- --------------------------------------------------------------------------------
Total Expenses 1,717
Expenses Paid Indirectly--Note D (3)
- --------------------------------------------------------------------------------
Net Expenses 1,714
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 7,133
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 2,919
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 40,685
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $50,737
================================================================================
15
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
Convertible Securities Fund
---------------------------
Six Months Year
Ended Ended
May 31, 2003 Nov. 30, 2002
(000) (000)
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 7,133 $ 12,083
Realized Net Gain (Loss) 2,919 (31,620)
Change in Unrealized Appreciation (Depreciation) 40,685 (7,239)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 50,737 (26,776)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income (6,853) (12,489)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (6,853) (12,489)
- --------------------------------------------------------------------------------
Capital Share Transactions
Issued 242,461 104,042
Issued in Lieu of Cash Distributions 5,826 10,764
Redeemed (43,287) (85,029)
- --------------------------------------------------------------------------------
Net Increase (Decrease)
from Capital Share Transactions 205,000 29,777
- --------------------------------------------------------------------------------
Total Increase (Decrease) 248,884 (9,488)
- --------------------------------------------------------------------------------
Net Assets
Beginning of Period 290,697 300,185
- --------------------------------------------------------------------------------
End of Period $539,581 $290,697
================================================================================
1Shares Issued (Redeemed)
Issued 22,442 9,593
Issued in Lieu of Cash Distributions 553 970
Redeemed (4,015) (7,828)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 18,980 2,735
================================================================================
16
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Total Return and shows
net investment income and expenses as percentages of average net assets. These
data will help you assess: the variability of the fund's net income and total
returns from year to year; the relative contributions of net income and capital
gains to the fund's total return; how much it costs to operate the fund; and the
extent to which the fund tends to distribute capital gains. The table also shows
the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of
100% means that the average security is held in the fund for one year.
CONVERTIBLE SECURITIES FUND
SIX MONTHS YEAR ENDED NOVEMBER 30,
ENDED ------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAY 31, 2003 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.57 $12.12 $12.68 $13.18 $11.10 $13.01
Investment Operations
Net Investment Income .19 .47 .53 .56 .52 .52
Net Realized and Unrealized Gain (Loss)
on Investments 1.07 (1.53) (.04) .19 2.13 (.77)
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.26 (1.06) .49 .75 2.65 (.25)
- ---------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.22) (.49) (.54) (.55) (.57) (.54)
Distributions from Realized Capital Gains -- -- (.51) (.70) -- (1.12)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (.22) (.49) (1.05) (1.25) (.57) (1.66)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.61 $10.57 $12.12 $12.68 $13.18 $11.10
=========================================================================================================
Total Return 12.15% -8.88% 3.98% 5.27% 24.85% -2.16%
=========================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $540 $291 $300 $323 $180 $172
Ratio of Total Expenses to
Average Net Assets 0.92%* 0.95% 0.71% 0.56% 0.55% 0.73%
Ratio of Net Investment Income to
Average Net Assets 3.80%* 4.27% 4.21% 4.19% 4.30% 4.36%
Portfolio Turnover Rate 107%* 118% 156% 182% 162% 186%
========================================================================================================
*Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
17
****
****
NOTES TO FINANCIAL STATEMENTS
Vanguard Convertible Securities Fund is registered under the Investment Company
Act of 1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Bonds, and temporary cash investments acquired over
60 days to maturity, are valued using the latest bid prices or using valuations
based on a matrix system (which considers such factors as security prices,
yields, maturities, and ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value.
2. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances into a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
3. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Premiums and discounts on
debt securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Oaktree Capital Management, LLC, provides investment advisory services to the
fund for a fee calculated at an annual percentage rate of average net assets.
The basic fee is subject to quarterly adjustments based on the fund's
performance for the preceding three years relative to the Credit Suisse First
Boston Convertible Securities Index. For the six months ended May 31, 2003, the
investment advisory fee represented an effective annual basic rate of 0.41% of
the fund's average net assets before an increase of $317,000 (0.17%) based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At May 31, 2003, the fund had contributed capital of $87,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.09% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
18
D. The fund's custodian bank has agreed to reduce its fees when the fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended May 31, 2003, custodian fee offset arrangements reduced
expenses by $3,000.
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
Certain of the fund's convertible preferred stock investments are treated
as debt securities for tax purposes. During the six months ended May 31, 2003,
the fund realized gains of $350,000 from the sale of these securities, which are
included in distributable net investment income for tax purposes; accordingly,
such gains have been reclassified from accumulated net realized gains to
undistributed net investment income.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at November 30, 2002, the fund had
available realized losses of $77,387,000 to offset future net capital gains of
$45,572,000 through November 30, 2009, and $31,815,000 through November 30,
2010. The fund will use these capital losses to offset net taxable capital
gains, if any, realized during the year ending November 30, 2003; should the
fund realize net capital losses for the year, the losses will be added to the
loss carryforward balances above.
At May 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $46,352,000, consisting of unrealized gains of $47,017,000 on
securities that had risen in value since their purchase and $665,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the six months ended May 31, 2003, the fund purchased $396,706,000 of
investment securities and sold $191,270,000 of investment securities, other than
temporary cash investments.
G. The market value of securities on loan to broker/dealers at May 31, 2003, was
$46,807,000, for which the fund held cash collateral of $47,765,000. The fund
invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
19
- --------------------------------------------------------------------------------
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20
The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
investments they have made as private individuals. Our independent board members
bring distinguished backgrounds in business, academia, and public service to
their task of working with Vanguard officers to establish the policies and
oversee the activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers. The dates in parentheses below show when each trustee was
initially elected.
- --------------------------------------------------------------------------------
John J. Brennan* Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the (1987)
investment companies served by The Vanguard Group.
- --------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Charles D. Ellis The Partners of '63 (pro bono ventures in education); Senior
Adviser to Greenwich Associates (international business (2001) strategy
consulting); Successor Trustee of Yale University; Overseer of the Stern School
of Business at New York University; Trustee of the Whitehead Institute for
Biomedical Research.
Rajiv L. Gupta Chairman and Chief Executive Officer (since October 1999), Vice
Chairman (January-September 1999), and Vice (2001) President (prior to September
1999) of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic
components), and Agere Systems (communications components); Board Member of the
American Chemistry Council; Trustee of Drexel University.
JoAnn Heffernan Heisen Vice President, Chief Information Officer, and Member of
the Executive Committee of Johnson & Johnson (1998) (pharmaceuticals/consumer
products); Director of the Medical Center at Princeton and Women's Research and
Education Institute.
Burton G. Malkiel Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Vanguard Investment Series plc (1977) (Irish investment
fund) (since November 2001), Vanguard Group (Ireland) Limited (Irish investment
management firm) (since November 2001), Prudential Insurance Co. of America, BKF
Capital (investment management firm), The Jeffrey Co. (holding company), and
NeuVis, Inc. (software company).
Alfred M. Rankin, Jr. Chairman, President, Chief Executive Officer, and Director
of NACCO Industries, Inc. (forklift trucks/housewares/ (1993) lignite); Director
of Goodrich Corporation (industrial products/aircraft systems and services);
Director until 1998 of Standard Products Company (a supplier for the automotive
industry).
J. Lawrence Wilson Retired Chairman and Chief Executive Officer of Rohm and Haas
Co. (chemicals); Director of Cummins Inc. (diesel (1985) engines), MeadWestvaco
Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. Gregory Barton Secretary; Managing Director and General Counsel of The
Vanguard Group, Inc. (since September 1997); Secretary of The Vanguard Group and
of each of the investment companies served by The Vanguard Group; Principal of
The Vanguard Group (prior to September 1997).
Thomas J. Higgins Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of
each of the investment companies served by The Vanguard Group.
- --------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
Mortimer J. Buckley, Information Technology.
F. William McNabb, III, Client Relationship Group.
James H. Gately, Investment Programs and Services.
Michael S. Miller, Planning and Development.
Kathleen C. Gubanich, Human Resources.
Ralph K. Packard, Finance.
Ian A. MacKinnon, Fixed Income Group.
George U. Sauter, Quantitative Equity Group.
- --------------------------------------------------------------------------------
John C. Bogle, Founder; Chairman and Chief Executive Officer, 1974-1996.
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Wellington, and the ship logo are
trademarks of The Vanguard Group, Inc.
All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
The photographs of the sails and ship that appear on the cover of this report
are copyrighted by Michael Kahn.
FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
To receive a free copy of the prospectus or the Statement of Additional
Information, or to request additional information about the fund or other
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
e-mail through Vanguard.com(R). Prospectuses may also be viewed online.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q822 072003
Item 2: Code(s) of Ethics for senior financial officers - Item not applicable to
semi-annual report.
Item 3: Audit Committee Financial Expert - Item not applicable to semi-annual
report.
Item 4: Principal Accountant Fees and Services - Item not applicable to
semi-annual report.
Item 5: Not Applicable.
Item 6: Reserved.
Item 7: Not applicable.
Item 8: Reserved.
Item 9: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and
Financial Officers concluded that the Registrant's Disclosure Controls and
Procedures are effective based on their evaluation of the Disclosure Controls
and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Controls. There were no significant changes in Registrant's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 10: Exhibits attached hereto. (Attach certifications as exhibits)
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD CONVERTIBLE SECURITIES FUND
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: July 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
VANGUARD CONVERTIBLE SECURITIES FUND
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: : July 8, 2003
VANGUARD CONVERTIBLE SECURITIES FUND
BY: (signature)
----------------------------------------
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: : July 8, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Name of Issuer: VANGUARD CONVERTIBLE SECURITIES FUND
In connection with the Report on Form N-CSR of the above-named issuer that
is accompanied by this certification, the undersigned hereby certifies, to his
knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15 (d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all materials
respects, the financial condition and results of operations of the issuer.
Date: July 8, 2003 /s/ John J. Brennan
-----------------------
John J. Brennan
Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Name of Issuer: VANGUARD CONVERTIBLE SECURITIES FUND
In connection with the Report on Form N-CSR of the above-named issuer is
accompanied by this certification, the undersigned hereby certifies, to his
knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15 (d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all materials
respects, the financial condition and results of operations of the issuer.
Date: July 8, 2003 /s/ Thomas J. Higgins
-----------------------
Thomas J. Higgins
Treasurer
CERTIFICATIONS
--------------
I, John J. Brennan, certify that:
1. I have reviewed this report on Form N-CSR of Vanguard Convertible Securities
Fund;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations, changes in net assets, and cash
flows (if the financial statements are required to include a statement of cash
flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this report
(the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 8, 2003
/s/ John J. Brennan
----------------------
CHIEF EXECUTIVE OFFICER
CERTIFICATIONS
--------------
I, Thomas J. Higgins, certify that:
1. I have reviewed this report on Form N-CSR of Vanguard Convertible Securities
Fund;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations, changes in net assets, and cash
flows (if the financial statements are required to include a statement of cash
flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this report
(the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 8, 2003
/s/ Thomas J. Higgins
-----------------
TREASURER