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: 33-4424
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
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 - November 30, 2003
ITEM 1: Reports to Shareholders
VANGUARD(R) CONVERTIBLE SECURITIES FUND
NOVEMBER 30, 2003
[GRAPHIC]
ANNUAL REPORT
THE VANGUARD GROUP(R) LOGO
HOW TO READ YOUR FUND REPORT
This report contains information that can help you evaluate your investment. It
includes details about your fund's return and presents data and analysis that
provide insight into the fund's performance and investment approach.
By reading the letter from Vanguard's chairman, John J. Brennan, together with
the letter from the managers who select securities for your fund, you'll get an
understanding of how the fund invests and how the market environment affected
its performance. The statistical information that follows can help you
understand how the fund's performance and characteristics stack up against those
of similar funds and market benchmarks.
It's important to keep in mind that the opinions expressed by Vanguard's
investment managers are just that: informed opinions. They should not be
considered promises or advice. The opinions, like the statistics, cover the
period through the date on the cover of this report. As things change--and in
the financial markets you can be certain only of change--an investment manager's
job is to evaluate new information and make adjustments, if necessary. Of
course, the risks of investing in the fund are spelled out in the prospectus.
Frequent updates on the fund's performance and information about some of its
holdings are available on Vanguard.com(R).
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CONTENTS
1 letter from the chairman
6 report from the advisor
10 fund profile
11 glossary of investment terms
13 performance summary
14 your fund's after-tax returns
15 about your fund's expenses
16 financial statements
26 advantages of vanguard.com
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SUMMARY
* Vanguard Convertible Securities Fund posted a return of 28.1% during the 12
months ended November 30, 2003.
* The fund outpaced all of its comparative measures by several percentage
points.
* During the fiscal year, common stocks rebounded and bonds with lower credit
ratings surged, providing a favorable environment for hybrid convertibles.
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get fund reports online.
LETTER FROM THE CHAIRMAN
Fellow Shareholder,
During the 12 months ended November 30, 2003, the stock market rebounded
strongly from last year's bear-market lows. Convertible securities, which offer
some of the upside potential of stocks and some of the risk-reducing properties
of bonds, were particularly attractive to investors, who-- perhaps mindful of
rebounds that had petered out in previous years--drove up the prices of these
securities, generating total returns higher than those of common stocks. In this
environment, Vanguard Convertible Securities Fund earned 28.1%, its best
fiscal-year result in 12 years.
[PICTURES OF JOHN J. BRENNAN]
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2003 TOTAL RETURNS FISCAL YEAR ENDED
NOVEMBER 30
- -------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND 28.1%
CS First Boston Convertibles Index 23.7
Average Convertible Securities Fund* 22.1
Wilshire 5000 Index 19.0
- -------------------------------------------------------
*Derived from data provided by Lipper Inc.
As the table at left shows, your fund's total return (capital change plus
reinvested distributions) was well above those of its main comparative
measures--the unmanaged Credit Suisse First Boston Convertible Securities Index
and the average mutual fund peer-- and about 9 percentage points higher than the
return of the broad U.S. stock market, as measured by the Wilshire 5000 Total
Market Index. The per-share components of your fund's total return--dividends
and change in net asset value--appear on page 5. The fund's yield at fiscal
year-end was 3.73%, 36 basis points lower than at the start of the period.
STOCKS SURGED ON POSITIVE ECONOMIC AND FINANCIAL REPORTS
The prospect of war with Iraq and a spate of weak economic reports depressed
U.S. stock prices in the opening months of the fiscal year.
1
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If you hold the fund in a taxable account, please see page 14 for a report on
the fund's after-tax returns.
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Once the start of combat dissipated some uncertainties, however, investors' mood
turned upbeat, igniting a robust stock market rally. In the fiscal year's final
weeks, stocks were propelled by reports that productivity and manufacturing
activity were growing rapidly, while profits at U.S. corporations rose nearly
30% in the third calendar quarter from their year-earlier levels.
For the 12 months, the broad market, as measured by the Wilshire 5000 Index,
returned 19.0%. Within market-capitalization ranges, gains were substantially
similar for growth and value stocks (i.e., stocks that sport premium prices for
their earnings growth potential versus those having bargain-basement price tags
relative to earnings, book value, or other measures). A large divergence between
small- and large-company stock returns, however, suggested that investors had a
renewed interest in riskier stocks. The 36.3% return of the small-cap Russell
2000 Index was more than double the result of the large- and mid-cap Russell
1000 Index.
Stock gains were equally impressive in many international markets, particularly
those in the Pacific Rim nations and emerging-markets countries. For U.S.-based
investors, the weakening of the dollar relative to most major currencies boosted
returns from abroad.
BOND INVESTORS WERE REWARDED FOR TAKING GREATER RISKS
As in the stock market, the best returns in the bond market came from the
riskiest securities. Returns of corporate bonds exceeded those of U.S. Treasury
securities with comparable maturities, while below-investment-grade bonds posted
spectacular results that topped the gain of the broad stock market. The Lehman
Brothers High Yield Bond Index, which tracks the performance of bonds issued by
companies with "junk" credit ratings, returned 27.9%. The yield of the benchmark
10-year Treasury note rose 12 basis points (0.12 percentage point) during the
period to 4.33%. For the 12 months, the Lehman Aggregate Bond Index, a measure
of the taxable investment-grade bond market, returned 5.2%, as rising interest
income offset falling bond prices.
The story was different among the shortest-maturity debt securities, whose
yields are influenced more strongly by the Federal Reserve
2
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MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 2003
--------------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
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STOCKS
Russell 1000 Index (Large-caps) 16.9% -4.9% 0.2%
Russell 2000 Index (Small-caps) 36.3 8.5 8.0
Wilshire 5000 Index (Entire market) 19.0 -3.3 0.8
MSCI All Country World Index
ex USA (International) 27.1 -2.3 0.7
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BONDS
Lehman Aggregate Bond Index 5.2% 7.9% 6.5%
(Broad taxable market)
Lehman Municipal Bond Index 6.7 7.2 5.7
Citigroup 3-Month Treasury Bill Index 1.1 2.4 3.6
==============================================================================
CPI
Consumer Price Index 1.8% 2.0% 2.4%
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Board's actions than by market forces. In June, the Fed reduced its target
federal-funds rate by 25 basis points to 1.00%, the lowest level since 1958. The
yield of the 3-month Treasury bill, a fair proxy for money market interest
rates, fell to 0.81% in mid-June, then rose modestly to end the fiscal year at
0.93%, 28 basis points lower than its year-ago level.
YIELD SPREADS NARROWED, BENEFITING CONVERTIBLES
The Convertible Securities Fund's 28.1% return, a stellar result in both
absolute and relative terms, was bolstered by several factors. As hybrid
securities with some characteristics of bonds and some of stocks, convertibles
benefited from both the resurgence of stocks, particularly small-cap stocks, and
the narrowing of the credit yield spread, as prices for riskier debt issues
surged well ahead of those for investment-grade securities. (Convertibles tend
to be issued by smaller companies with lower credit ratings, though several blue
chips floated offerings in the past year.)
In addition, the technology and telecommunications industries-- the very sectors
that helped drag down your fund's performance last fiscal year--boosted the
fund's absolute returns during fiscal 2003. Compared with its benchmarks,
however, your fund was light in these sectors earlier in the year, which
dampened performance relative to the index during the first six months.
Most important, the fund's investment advisor, Oaktree Capital Management, added
value through its security selection in several sectors, as the prices of some
of its long-term holdings skyrocketed. For details on individual securities and
fund performance, see the Report from the Advisor, which begins on page 6.
3
THE FUND HAS DELIVERED SOLID LONG-TERM PERFORMANCE
Of course, a 28.1% one-year return is exceptional and should not be expected
consistently from any fund, whether it invests in convertibles or another asset
class. But the fund has also done well over longer periods. As the accompanying
table shows, over the past decade, your fund delivered a solid annualized return
of 8.7%. This result was roughly on par with those of its comparative
standards--slightly outpacing the gain of the average competing fund but
slightly lagging that of the benchmark index--and not far below the return of
common stocks. However, your fund generated this solid return with lower
volatility than any of these measures. Unlike some fund peers that will on
occasion invest in other asset classes, your fund invests almost exclusively in
convertible bonds and some convertible preferred stocks. In addition, the
advisor carefully screens companies for creditworthiness.
We believe that the Convertible Securities Fund will continue to perform
competitively because of both the investment skills of the fund advisor and our
cost advantage. In fact, Vanguard's expense ratios are typically just a fraction
of those of other fund companies, which has two key implications. First, more of
our funds' returns go to shareholders. Second, our competitors must generate
gross returns higher than ours to match our net returns--a difficult hurdle to
surmount year after year. The cost of investing--unlike other factors, such as
the performance of the financial markets--is within your control. (A comparison
of your fund's cost with the average cost of its competitors is provided on page
15.)
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TOTAL RETURNS TEN YEARS ENDED
NOVEMBER 30, 2003
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Convertible Securities Fund 8.7% $23,051
CS First Boston Convertibles Index 9.1 23,930
Average Convertible Securities Fund 8.4 22,494
Wilshire 5000 Index 10.3 26,648
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BALANCE NEVER GOES OUT OF STYLE
The past several years have been a roller-coaster ride for investors, as one of
the longest bull markets in history was followed by one of the worst bear
markets for stocks, which in turn underwent a remarkable resurgence this year.
Although probably no investor escaped unscathed, those who were diversified
across and within asset classes weathered
4
the ride better than those who were not. Volatile markets reinforce the virtue
of the time-honored principle of balance--holding stocks, bonds, and short-term
reserves in allocations appropriate for your goals, time horizon, and risk
tolerance. Because no one can accurately predict what the future will bring,
building and holding a balanced portfolio is the most prudent course. Vanguard
Convertible Securities Fund can play a valuable role in such a portfolio.
I feel compelled to close this letter with an assurance that the reports of
late-trading and market-timing at some competing investment management firms are
as shocking--and upsetting--to us as they no doubt are to you. Vanguard has
policies and procedures in place to identify and deter such behavior. More
important, I believe that Vanguard shareholders can be confident both in the
integrity of our excellent crew and in the benefits provided by our client-owned
corporate structure--a structure that perfectly aligns our day-to-day efforts
with your long-term financial goals.
Thank you for entrusting us with your assets.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DECEMBER 11, 2003
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YOUR FUND'S PERFORMANCE AT A GLANCE NOVEMBER 30, 2002-NOVEMBER 30, 2003
DISTRIBUTIONS PER SHARE
------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Convertible Securities Fund $10.57 $13.05 $0.41 $0.00
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5
REPORT FROM THE ADVISOR
Vanguard Convertible Securities Fund performed well during the second half of
fiscal 2003, taking the full year's absolute and relative performance to high
levels. For the 12 months, the fund earned 28.1%, outperforming its primary
benchmark, the CS First Boston Convertibles Index (+23.7%), as well as the
Goldman Sachs/Bloomberg U.S. Convertible 100 Index (+16.0%), another widely
followed convertibles benchmark. The fund also outperformed the Standard &
Poor's 500 Index and most of the widely followed bond indexes. Our
outperformance of the S&P 500 was largely a function of, first, our exposure to
convertibles from small- and mid-capitalization companies and, second, the
tightening of credit spreads, which boosted the valuations of convertible
securities. This performance advantage versus the S&P 500 should not be
considered sustainable, as convertibles normally lag in an equity advance.
THE INVESTMENT ENVIRONMENT
The second half of fiscal 2003 repeated many of the trends from the first half
of the year. The two most dominant themes were the continuation of credit-spread
tightening and the very robust issuance of new convertible securities. As
discussed in May's semiannual report, the tightening was primarily a result of
investors' becoming more optimistic about both the economy and corporate
fundamentals. Fundamentals have improved as corporations enhance their balance
sheets through transactions such as refinancing at lower rates and longer
maturities. New convertible issuance was also an important factor during fiscal
2003, as the year produced the second-highest dollar volume on record: $82.3
billion from 252 deals. This compares with the prior year's total of 115 deals
raising $52.3 billion.
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INVESTMENT PHILOSOPHY
The advisor believes that a reasonable level of current income and long-term
growth in capital can be achieved by investing in a broadly diversified group of
convertible securities that provide attractive combinations of current income
and potential for price appreciation from their convertibility into common
stock.
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Significant convertible issuers in fiscal 2003 included General Motors ($4.0
billion), Wells Fargo ($3.0 billion), American Express ($2.0 billion),
6
Schlumberger ($1.4 billion), and Walt Disney ($1.3 billion). Other deals we
especially liked came from Freeport-McMoRan Copper & Gold, Valeant
Pharmaceuticals International, Primus Telecom, and Continental Airlines. While
the dollar volume of new deals did not set a record, the number of new
securities did eclipse the 208 convertibles issued in 2001. The past year's
issuance was well diversified by industry, issuer, and credit quality. An
extraordinarily high proportion came in the form of coupon-bearing convertible
bonds--approximately 85%, compared with the previous five-year average of 42%.
We always prefer convertible bonds over other convertible structures, and thus
we welcome this trend.
Demand for convertibles remained quite strong throughout the year, as investors
appreciated the securities' benefits: the potential for appreciation when their
underlying common stocks move upward; relative protection when their underlying
stocks decline; higher current yields; and diversification. The demand for
attractively priced new deals currently exceeds supply, and thus many deals are
on an allocation basis.
THE FUND'S SUCCESSES
Our absolute performance continued to be influenced by the tightening of credit
spreads, but most of our performance advantage over the fund's benchmarks during
fiscal 2003 came from security selection. In particular, we saw outperformance
in our overweighted positions and in many of our small- and mid-cap
convertibles. (Small- and mid-cap stocks posted significant gains during 2003,
certainly driving up the prices of many convertibles.) Some of our
top-performing issues included Freeport-McMoRan, RF Micro Devices, Nextel
Communications, Navistar International, and Teva Pharmaceutical.
We also benefited from our aggressive buying around the middle of the year. This
was a period of relative price weakness caused by a dramatic oversupply of new
convertibles, overpricing of some of these deals, and adjustment to the new
dividend tax environment. This last factor was quite disruptive to the market as
corporations reevaluated their common dividend policies and, in many cases,
declared their first dividends or announced significant dividend increases. For
companies with outstanding convertibles, any significant increase in common
dividends diminishes the convertible's yield advantage and reduces the intrinsic
value of the security. The impact on our holdings from this factor was minimal,
but we took advantage of buying opportunities as they occurred.
7
THE FUND'S SHORTFALLS
While we are very pleased with the Convertible Securities Fund's return for
fiscal 2003, our underweighting of the tech/telecom area earlier in the year
proved to be a drag on our relative results. With spreads tightening, these
highly depressed convertibles produced some dramatic gains. The fund was also
underweighted in the automobile industry, specifically in the Ford 6.50%
convertible preferred, which did well and was the heaviest-weighted issue in the
CS First Boston Convertibles Index.
OUR POSITION
As we enter the new year, we are slightly accelerating our normal sell strategy
because the prices of many convertibles, especially those from small-cap
technology and telecom firms, have advanced to 140%-160% of par. We are
redeploying our sale proceeds into more balanced, higher-yielding issues that
will provide more downside protection in the event of a market pullback. The
convertible market's weighted-average delta (i.e., degree of participation in
the appreciation of underlying stocks) is higher than it was a year or two ago,
due to the significant rally in equities. Not counting a modest cash reserve,
our portfolio remains fully invested, with an approximate mix of 91% convertible
bonds and 9% convertible preferreds. We are very comfortable with the credit
profile of the portfolio and remain optimistic about the near-term outlook for
the convertible securities market.
LARRY KEELE, PORTFOLIO MANAGER
OAKTREE CAPITAL MANAGEMENT, LLC
DECEMBER 10, 2003
8
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PORTFOLIO CHANGES FISCAL YEAR ENDED NOVEMBER 30, 2003
NEW HOLDINGS COMMENTS
- --------------------------------------------------------------------------------
Valeant Pharmaceuticals Very attractive convertibles with above-
International (formerly average call protection. We believe the
ICN Pharmaceuticals) stock is priced attractively, and the
(3.0% convertible note due company has a new management team.
8/16/2010; 4.0% convertible
note due 11/15/2013)
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Fisher Scientific International A solid growth company with an attractive
convertible (2.50% convertible that carries seven years of full call
note due 10/01/2023) protection.
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Primus Telecommunications A statistically cheap convertible with
(3.75% convertible note due improving company fundamentals.
9/15/2010)
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REDUCTIONS
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Navistar International* The security reached our price target.
(2.50% convertible note due
12/15/2007)
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Teva Pharmaceutical* The bonds hit our price target in the
(0.75% convertible note due low 140s.
8/15/2021)
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Sealed Air* The security reached our price target and
($2.00 preferred) was eventually called by the company.
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Freeport-McMoRan This top-performing security has entered
(7.0% convertible note due 2/11/2011) our targeted Copper & Gold sell range. We
are reducing our weighting.
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*Eliminated from portfolio.
SEE PAGE 16 FOR A COMPLETE LIST OF THE FUND'S HOLDINGS.
9
FUND PROFILE AS OF 11/30/2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with a broad market index. Key terms are defined on pages 11 and 12.
CONVERTIBLE SECURITIES FUND
- -------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Number of Securities 100
Yield 3.7%
Conversion Premium 51.8%
Average Weighted Maturity 5.9 years
Average Coupon 3.8%
Average Quality B+
Average Duration 4.9 years
Foreign Holdings 8.3%
Turnover Rate 127%
Expense Ratio 0.84%
Short-Term Reserves 4%
- -------------------------------------------------------
- --------------------------------------
DISTRIBUTION BY CREDIT QUALITY
(% OF FIXED INCOME PORTFOLIO)
Aaa/AAA 0%
Aa/AA 0
A/A 2
Baa/BBB 11
Ba/BB 10
B/B 44
Below B/B 14
Not Rated 19
- --------------------------------------
Total 100%
- --------------------------------------
- -------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Tyco International Ltd. 3.8%
(conglomerate)
Valeant Pharmaceuticals International 3.1
(pharmaceuticals)
Fisher Scientific International Inc. 2.9
(retail)
Primus Telecommunications Group, Inc. 2.8
(telecommunications)
Continental Airlines, Inc. 2.7
(air transportation)
Echostar Communications Corp. 2.7
(telecommunications)
Nortel Networks Corp. 2.5
(telecommunications)
Veeco Instruments, Inc. 2.5
(electronics)
Navistar Financial Corp. 2.4
(financial services)
Service Corp. International 2.2
(consumer services)
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Top Ten 27.6%
- -------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
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VOLATILITY MEASURES
WILSHIRE
FUND 5000
- ----------------------------------------------
R-Squared 0.69 1.00
Beta 0.55 1.00
- ----------------------------------------------
- ----------------------------------------------
DISTRIBUTION BY MATURITY
(% OF FIXED INCOME PORTFOLIO)
Under 1 Year 0%
1--5 Years 44
5--10 Years 53
10--20 Years 3
20--30 Years 0
Over 30 Years 0
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Total 100%
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VISIT OUR WEBSITE AT VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
10
- ----------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
Auto & Transportation 7%
Consumer Discretionary 21
Consumer Staples 0
Financial Services 10
Health Care 16
Integrated Oils 0
Other Energy 4
Materials & Processing 2
Producer Durables 7
Technology 17
Utilities 7
Other 5
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Cash Investments 4%
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GLOSSARY OF INVESTMENT TERMS
AVERAGE COUPON. The average interest rate paid on the fixed income securities
held by a fund. It is expressed as a percentage of face value.
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AVERAGE DURATION. An estimate of how much the value of the bonds held by a fund
will fluctuate in response to a change in interest rates. To see how the value
could change, multiply the average duration by the change in rates. If interest
rates rise by 1 percentage point, the value of the bonds in a fund with an
average duration of five years would decline by about 5%. If rates decrease by a
percentage point, the value would rise by 5%.
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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 fixed income
securities held by a fund reach maturity and are repaid. The figure reflects the
proportion of fund assets represented by each security.
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11
GLOSSARY OF INVESTMENT TERMS (CONTINUED)
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a given market index. The 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%. 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 index, and the less reliable beta is as an indicator of
volatility.
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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$25520%).
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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 a given 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.
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SHORT-TERM RESERVES. The percentage of a fund invested in highly liquid,
short-term securities that can be readily converted to cash.
- -------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and may be more likely to
distribute capital gains (which may be 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.
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12
PERFORMANCE SUMMARY AS OF 11/30/2003
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
- --------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE NOVEMBER 30, 1993-NOVEMBER 30, 2003
CS FIRST AVERAGE
BOSTON CONVERTIBLE
CONVERTIBLE WILSHIRE CONVERTIBLES SECURITIES
SECURITIES FUND 5000 INDEX INDEX FUND*
199311 10000 10000 10000 10000
199402 10202 10265 10290 10341
199405 9558 9991 9712 9858
199408 9905 10455 10068 10182
199411 9565 10038 9613 9777
199502 9696 10807 9989 10078
199505 10216 11753 10795 10707
199508 10997 12750 11707 11360
199511 11201 13658 11917 11655
199602 11466 14503 12577 12303
199605 12268 15434 13268 12818
199608 12124 14945 12911 12649
199611 12867 17018 13746 13506
199702 13169 17719 14002 13987
199705 13561 18926 14492 14499
199708 14606 20516 15742 15543
199711 14772 21690 15861 15717
199802 15804 23828 16658 16691
199805 15939 24644 16912 16973
199808 13377 21064 14574 14772
199811 14453 25627 16077 16017
199902 14800 27245 16938 16689
199905 15983 29003 18202 17857
199908 16508 29252 18792 18207
199911 18044 31314 20990 19839
200002 22232 33016 26316 23954
200005 20215 31997 23181 22154
200008 23003 35102 25783 24296
200011 18995 29495 21314 20567
200102 19991 28214 21790 21230
200105 20445 28764 22185 21332
200108 19503 26132 20791 19504
200111 19751 26255 20556 19586
200202 18511 25852 19971 19685
200205 18874 25364 20224 19730
200208 17197 21805 17966 17548
200211 17998 22391 19351 18428
200302 18170 20269 19660 18827
200305 20184 23534 21930 20582
200308 21005 25045 22536 20795
200311 23051 26648 23930 22494
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 2003
------------------------------------ FINAL VALUE
ONE FIVE TEN OF A $10,000
YEAR YEARS YEARS INVESTMENT
- --------------------------------------------------------------------------------
Convertible Securities Fund 28.07% 9.79% 8.71% $23,051
Wilshire 5000 Index 19.01 0.78 10.30 26,648
CS First Boston
Convertibles Index 23.66 8.28 9.12 23,930
Average Convertible
Securities Fund* 22.06 7.03 8.44 22,494
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) NOVEMBER 30, 1993-NOVEMBER 30, 2003
CS FIRST
CONVERTIBLE BOSTON
SECURITIES CONVERTIBLES
FUND INDEX
1994 -4.4 -3.9
1995 17.1 24
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 -3.6
2002 -8.9 -5.9
2003 28.1 23.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED SEPTEMBER 30, 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 25.60% 9.72% 3.60% 4.54% 8.14%
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
Note: See Financial Highlights table on page 22 for dividend and capital gains
information.
13
YOUR FUND'S AFTER-TAX RETURNS
This table presents returns for your fund both before and after taxes. The
after-tax returns are shown in two ways: (1) assuming that an investor owned the
fund during the entire period and paid taxes on the fund's distributions, and
(2) assuming that an investor paid taxes on the fund's distributions and sold
all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital
gains tax rates in effect at the times of the distributions and the hypothetical
sales. State and local taxes were not considered. After-tax returns reflect the
reduced tax rates on ordinary income (including qualified dividend income) and
short-term capital gains that became effective as of January 1, 2003, and on
long-term capital gains realized on or after May 6, 2003. Qualified dividend
income is based on estimates for calendar year 2003. (In the example, returns
after the sale of fund shares may be higher than those assuming no sale. This
occurs when the sale would have produced a capital loss. The calculation assumes
that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation
and may differ from those shown. Also note that if you own the fund in a
tax-deferred account, such as an individual retirement account or a 401(k) plan,
this information does not apply to you. Such accounts are not subject to current
taxes.
Finally, keep in mind that a fund's performance--whether before or after
taxes--does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED NOVEMBER 30, 2003
ONE YEAR FIVE YEARS TEN YEARS
-------------------------------------
CONVERTIBLE SECURITIES FUND
Returns Before Taxes 28.07% 9.79% 8.71%
Returns After Taxes on Distributions 26.38 7.29 5.50
Returns After Taxes on Distributions
and Sale of Fund Shares 18.02 6.83 5.42
- --------------------------------------------------------------------------------
14
ABOUT YOUR FUND'S EXPENSES
All mutual funds have operating expenses. These expenses include costs for
portfolio management, administrative services, and shareholder reports (like
this one), among others. Operating expenses, which are deducted from a fund's
gross income, directly reduce the investment return of the fund. A fund's
expenses are expressed as a percentage of its net assets. This figure is known
as the expense ratio.
A HYPOTHETICAL EXAMPLE
We believe it is important for you to understand the impact of costs on your
investment. The following example illustrates the costs that you would incur
over a 12-month period if you invested $10,000 in the fund, using the fund's
actual return and operating expenses for the fiscal year ended November 30,
2003. The cost in dollars is calculated by applying the expense ratio to the
average balance in the hypothetical account. For comparative purposes, we also
list the average expense ratio for the fund's peer group, which is derived from
data provided by Lipper Inc.
- --------------------------------------------------------------------------------
COST OF $10,000 FUND PEER GROUP*
INVESTMENT IN FUND EXPENSE RATIO EXPENSE RATIO
- --------------------------------------------------------------------------------
Convertible Securities Fund $96 0.84% 1.49%
- --------------------------------------------------------------------------------
*Average Convertible Securities Fund.
The calculation assumes no shares were sold. Your actual costs may have been
higher or lower, depending on the amount of your investment and your holding
period. Peer-group ratio captures data through year-end 2002.
You can find more information about the fund's expenses, including annual
expense ratios for the past five years, in the Financial Statements section of
this report. For additional information on operating expenses and other
shareholder costs, please refer to the fund's prospectus. The prospectus
presents hypothetical shareholder costs over various time periods based upon a
$10,000 investment and a return of 5% a year. This standardized example, which
appears in all mutual fund prospectuses, may be useful to you in comparing the
costs of investing in different funds.
15
FINANCIAL STATEMENTS AS OF 11/30/2003
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 (87.6%)
- ---------------------------------------------------------------------------
AUTO & TRANSPORTATION (7.3%)
Continental Airlines, Inc.
4.50%, 2/1/2007 $ 19,400 $ 17,169
(1)5.00%, 6/15/2023 3,815 4,874
General Motors Corp.
4.50%, 3/6/2032 192 4,825
Lear Corp.
0.00%, 2/20/2022 17,855 9,151
Mesa Air Group Inc.
(1)2.482%, 6/16/2023 6,250 3,867
Navistar Financial Corp.
4.75%, 4/1/2009 19,235 19,908
-------------
$ 59,794
-------------
CONSUMER DISCRETIONARY (20.4%)
CIBER Inc.
(1)2.875%, 12/15/2023 1,970 2,009
The Walt Disney Co.
2.125%, 4/15/2023 11,750 12,293
Eastman Kodak Co.
(1)3.375%, 10/15/2033 7,875 8,505
Echostar Communications Corp.
5.75%, 5/15/2008 20,715 21,802
iDine Rewards
(1)3.25%, 10/15/2023 1,025 922
IKON Office Solutions, Inc.
(1)5.00%, 5/1/2007 1,600 1,530
Lamar Advertising Co.
2.875%, 12/31/2010 5,350 5,310
Liberty Media Corp.
(1)0.75%, 3/30/2023 11,180 12,452
Lions Gate Entertainment
(1)4.875%, 12/15/2010 5,135 5,289
Lowe's Cos., Inc.
0.861%, 10/19/2021 6,745 7,436
Memberworks, Inc.
(1)5.50%, 10/1/2010 5,835 5,871
NCO Group, Inc.
4.75%, 4/15/2006 10,040 10,278
J.C. Penney & Co., Inc.
5.00%, 10/15/2008 16,345 17,509
The Pep Boys (Manny, Moe & Jack)
(1)4.25%, 6/1/2007 855 943
4.25%, 6/1/2007 12,530 13,814
Royal Caribbean Cruises Ltd.
0.00%, 5/18/2021 13,733 7,210
16
- ---------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- ---------------------------------------------------------------------------
Service Corp. International
6.75%, 6/22/2008 $ 17,340 $ 18,012
Triarc Cos., Inc
(1)5.00%, 5/15/2023 10,710 11,540
5.00%, 5/15/2023 1,520 1,638
Waste Connections, Inc.
5.50%, 4/15/2006 2,445 2,641
-------------
$ 167,004
-------------
CONSUMER STAPLES (0.1%)
Performance Food Group Co.
5.50%, 10/16/2008 915 1,169
FINANCIAL SERVICES (6.1%)
Fairfax Financial Holdings, Ltd.
(1)5.00%, 7/15/2023 5,865 5,711
5.00%, 7/15/2023 425 414
HCC Insurance Holdings, Inc.
1.30%, 4/1/2023 5,285 5,510
Meristar Hospitality Corp. REIT
9.50%, 4/1/2010 6,420 7,551
Ohio Casualty Corp.
5.00%, 3/19/2022 13,785 14,250
Providian Financial Corp.
3.25%, 8/15/2005 7,290 6,935
United Rentals NA Inc.
(1)1.875%, 10/15/2023 9,195 9,091
-------------
$ 49,462
-------------
HEALTH CARE (16.3%)
Axcan Pharma Inc.
(1)4.25%, 4/15/2008 7,140 8,854
Celgene Corp.
(1)1.75%, 6/1/2008 10,675 12,716
Cephalon, Inc.
2.50%, 12/15/2006 2,000 1,875
Fisher Scientific International Inc.
(1)2.50%, 10/1/2023 21,105 23,374
Invitrogen Inc.
2.25%, 12/15/2006 6,915 7,192
Ivax Corp.
5.50%, 5/15/2007 10,830 11,047
NPS Pharmaceuticals Inc.
(1)3.00%, 6/15/2008 7,640 8,385
Pharmaceutical Resources, Inc.
(1)2.875%, 9/30/2010 9,725 11,086
QLT Inc.
(1)3.00%, 9/15/2023 4,910 5,953
Sunrise Assisted Living, Inc.
(1)5.25%, 2/1/2009 1,570 1,811
5.25%, 2/1/2009 13,430 15,495
Valeant Pharmaceuticals International
(1)3.00%, 8/16/2010 13,640 14,578
(1)4.00%, 11/15/2013 9,720 10,534
-------------
$ 132,900
-------------
OTHER ENERGY (2.0%)
Halliburton Co.
(1)3.125%, 7/15/2023 2,530 2,524
Pride International, Inc.
(1)2.50%, 3/1/2007 4,020 4,533
Reliant Resources, Inc.
(1)5.00%, 8/15/2010 8,730 9,025
-------------
$ 16,082
-------------
MATERIALS & Processing (2.0%)
Freeport-McMoRan Copper & Gold, Inc.
7.00%, 2/11/2011 1,495 2,499
Millennium Chemical
(1)4.00%, 11/15/2023 785 875
Placer Dome Inc. Cvt.
(1)2.75%, 10/15/2023 2,765 3,252
Sealed Air Corp.
(1)3.00%, 6/30/2033 9,415 9,733
-------------
$ 16,359
-------------
PRODUCER DURABLES (6.1%)
American Tower Corp.
(1)3.25%, 8/1/2010 7,290 8,818
Axcelis Technologies
4.25%, 1/15/2007 9,000 8,854
Photronics, Inc.
4.75%, 12/15/2006 1,470 1,448
Powerwave Technologies, Inc.
(1)1.25%, 7/15/2008 10,570 10,475
Veeco Instruments, Inc.
4.125%, 12/21/2008 19,790 20,532
-------------
$ 50,127
-------------
TECHNOLOGY (16.1%)
Acxiom Corp.
3.75%, 2/15/2009 1,240 1,350
Avaya Inc.
0.00%, 10/31/2021 14,550 8,930
Documentum, Inc.
(1)4.50%, 4/1/2007 2,760 3,398
EDO Corp.
(1)5.25%, 4/15/2007 745 775
5.25%, 4/15/2007 1,000 1,040
FEI Co.
(1)0.00%, 6/15/2023 3,000 3,195
Flir Systems, Inc.
(1)3.00%, 6/1/2023 8,515 8,994
17
- ---------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- ---------------------------------------------------------------------------
Flextronics International Ltd.
(1)1.00%, 8/1/2010 $ 6,170 $ 7,666
HNC Software, Inc.
(1)5.25%, 9/1/2008 2,005 2,303
5.25%, 9/1/2008 8,750 10,052
International Rectifier Corp.
4.25%, 7/15/2007 11,230 11,216
LSI Logic
(1)4.00%, 5/15/2010 9,290 10,533
Lucent Technologies, Inc.
2.75%, 6/15/2023 5,080 6,210
Nextel Communications, Inc.
6.00%, 6/1/2011 14,695 17,156
Nortel Networks Corp.
4.25%, 9/1/2008 21,875 20,645
Radisys Corp
(1)1.375%, 11/15/2023 1,020 1,046
Vishay Intertechnology, Inc.
(1)3.625%, 8/1/2023 12,940 17,153
-------------
$ 131,662
-------------
UTILITIES (7.2%)
Calpine Corp.
4.00%, 12/26/2006 9,555 9,304
(1)4.75%, 11/15/2023 9,910 9,192
Level 3 Communications, Inc.
2.875%, 7/15/2010 1,500 1,515
Mediacom Communications Corp.
5.25%, 7/1/2006 3,740 3,492
Primus Telecommunications Group, Inc.
5.75%, 2/15/2007 11,305 11,022
(1)3.75%, 9/15/2010 8,410 12,005
Quanta Services Inc.
(1)4.50%, 10/1/2023 11,455 12,171
-------------
$ 58,701
-------------
OTHER (4.0%)
Gencorp, Inc.
5.75%, 4/15/2007 1,320 1,267
Tyco International Ltd.
2.75%, 1/15/2018 4,710 5,481
(1)2.75%, 1/15/2018 22,160 25,789
-------------
$ 32,537
-------------
- ---------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS (Cost $661,241) $ 715,797
- ---------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (9.1%)
- ---------------------------------------------------------------------------
Consumer Discretionary (0.8%)
Allied Waste Industries, Inc.
6.25% Cvt. Pfd. 73,610 $ 5,200
Emmis Communications Corp.
6.25% Cvt. Pfd. 25,000 1,154
-------------
$ 6,354
-------------
FINANCIAL SERVICES (4.0%)
Commerce Capital
(1)5.95% Cvt. Pfd. 76,400 4,546
5.95% Cvt. Pfd. 74,400 4,427
New York Community Bancorp
6.00% Cvt. Pfd. 74,800 5,741
Reinsurance Group of America, Inc.
5.75% Cvt. Pfd. 65,000 3,767
United Rentals
6.50% Cvt. Pfd. 215,800 9,091
Washington Mutual, Inc.
(1)5.375% Cvt. Pfd. 75,800 4,543
-------------
$ 32,115
-------------
OTHER ENERGY (2.0%)
Chesapeake Energy Corp.
5.00% Cvt. Pfd. 66,100 6,808
Hanover Compressor Capital Trust
7.25% Cvt. Pfd. 175,700 7,862
Williams Cos., Inc.
(1)5.50% Cvt. Pfd. 30,000 1,871
-------------
$ 16,541
-------------
PRODUCER DURABLES (0.8%)
Xerox Corp.
6.25% Cvt. Pfd. 57,800 $ 6,815
-------------
TECHNOLOGY (1.2%)
Lucent Technologies Capital Trust I
7.75% Cvt. Pfd. 9,570 10,183
UTILITIES (0.3%)
Dominion Resources, Inc.
9.50% Cvt. Pfd. 46,900 2,577
- ---------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $64,211) $ 74,585
- ---------------------------------------------------------------------------
18
- ---------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (17.1%)
- ---------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.05%, 12/1/2003 $ 33,065 $ 33,065
1.05%, 12/1/2003--Note G 106,795 106,795
- ---------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS (Cost $139,860) $ 139,860
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (113.8%) (Cost $865,312) $ 930,242
- ---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-13.8%)
- ---------------------------------------------------------------------------
Other Assets--Note C 16,173
Payables for Investment Securities Purchased (20,572)
Security Lending Collateral Payable to Brokers--Note G (106,795)
Other Liabilities (1,858)
-------------
(113,052)
-------------
- ---------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------
Applicable to 62,642,817 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 817,190
- ---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 13.05
===========================================================================
*See Note A in Notes to Financial Statements.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At November 30, 2003, the aggregate
value of these securities was $344,310,000, representing 42.1% of net assets.
- ---------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------
AT NOVEMBER 30, 2003, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Paid-in Capital $ 762,743 $ 12.18
Undistributed Net
Investment Income 5,543 .09
Accumulated Net
Realized Losses (16,026) (.26)
Unrealized Appreciation 64,930 1.04
- ---------------------------------------------------------------------------
NET ASSETS $ 817,190 $ 13.05
===========================================================================
See Note E in Notes to Financial Statements for the tax-basis components
of net assets.
19
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
YEAR ENDED NOVEMBER 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 4,519
Interest 19,476
Security Lending 180
- --------------------------------------------------------------------------------
Total Income 24,175
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,996
Performance Adjustment 675
The Vanguard Group--Note C
Management and Administrative 1,548
Marketing and Distribution 53
Custodian Fees 13
Auditing Fees 16
Shareholders' Reports and Proxies 38
Trustees' Fees and Expenses 1
- --------------------------------------------------------------------------------
Total Expenses 4,340
Expenses Paid Indirectly--Note D (6)
- --------------------------------------------------------------------------------
Net Expenses 4,334
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 19,841
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 61,788
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES 59,263
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 140,892
================================================================================
20
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
--------------------------------------
YEAR ENDED NOVEMBER 30,
--------------------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 19,841 $ 12,083
Realized Net Gain (Loss) 61,788 (31,620)
Change in Unrealized Appreciation
(Depreciation) 59,263 (7,239)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 140,892 (26,776)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (16,869) (12,489)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (16,869) (12,489)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 515,418 104,042
Issued in Lieu of Cash Distributions 14,331 10,764
Redeemed (127,279) (85,029)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 402,470 29,777
- --------------------------------------------------------------------------------
Total Increase (Decrease) 526,493 (9,488)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 290,697 300,185
- --------------------------------------------------------------------------------
End of Period $ 817,190 $ 290,697
================================================================================
1 Shares Issued (Redeemed)
Issued 44,868 9,593
Issued in Lieu of Cash Distributions 1,265 970
Redeemed (10,983) (7,828)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares
Outstanding $ 35,150 $ 2,735
================================================================================
21
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
- ---------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.57 $12.12 $12.68 $13.18 $11.10
- ---------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .41 .47 .53 .56 .52
Net Realized and Unrealized Gain (Loss)
on Investments 2.48 (1.53) (.04) .19 2.13
- ---------------------------------------------------------------------------------------------------
Total from Investment Operations 2.89 (1.06) .49 .75 2.65
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.41) (.49) (.54) (.55) (.57)
Distributions from Realized Capital Gains -- -- (.51) (.70) --
- ---------------------------------------------------------------------------------------------------
Total Distributions (.41) (.49) (1.05) (1.25) (.57)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.05 $10.57 $12.12 $12.68 $13.18
===================================================================================================
TOTAL RETURN 28.07% -8.88% 3.98% 5.27% 24.85%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $817 $291 $300 $323 $180
Ratio of Total Expenses to
Average Net Assets* 0.84% 0.95% 0.71% 0.56% 0.55%
Ratio of Net Investment Income to
Average Net Assets 3.82% 4.27% 4.21% 4.19% 4.30%
Portfolio Turnover Rate 127% 118% 156% 182% 162%
===================================================================================================
* Includes performance-based investment advisory fee increases (decreases) of
0.13%, 0.21%, 0.01%, (0.14%), and (0.22%).
22
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 year ended November 30, 2003, the
investment advisory fee represented an effective annual basic rate of 0.38% of
the fund's average net assets before an increase of $675,000 (0.13%) based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At November 30, 2003, the fund had contributed capital of $123,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.12% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
year ended November 30, 2003, custodian fee offset arrangements reduced expenses
by $6,000.
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 year ended November 30, 2003, the
fund realized gains of $435,000 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.
For tax purposes, at November 30, 2003, the fund had $6,561,000 of ordinary
income available for distribution. The fund had available realized losses of
$16,034,000 to offset future net capital gains through November 30, 2010.
At November 30, 2003, net unrealized appreciation of investment securities for
tax purposes was $64,930,000, consisting of unrealized gains of $68,364,000 on
securities that had risen in value since their purchase and $3,434,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended November 30, 2003, the fund purchased $1,028,216,000 of
investment securities and sold $626,776,000 of investment securities, other than
temporary cash investments.
G. The market value of securities on loan to broker/dealers at November 30,
2003, was $104,973,000, for which the fund held cash collateral of $106,795,000.
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.
24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Convertible Securities Fund:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Convertible Securities Fund (the "Fund") at November 30, 2003, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 2003 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 6, 2004
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
(UNAUDITED) FOR VANGUARD CONVERTIBLE SECURITIES FUND
This information for the fiscal year ended November 30, 2003, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 6.6% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
The fund intends to distribute the maximum amount of qualified dividend income
allowable. The amount of qualified dividend income distributed by the fund will
be provided to individual shareholders on their 2003 Form 1099-DIV.
- --------------------------------------------------------------------------------
25
INVESTING IS FAST, EASY, AND SECURE ON VANGUARD.COM
If you're like many Vanguard investors, you believe in planning and taking
control of your own investments. VANGUARD.COM was built for you--and it keeps
getting better. research and plan your investments with confidence
Use our PLANNING & ADVICE and RESEARCH FUNDS & STOCKS sections to:
* Determine what asset allocation might best suit your needs--by taking our
Investor Questionnaire.
* Find out how much to save for retirement and your children's college
education-- by using our planning tools.
* Learn how to achieve your goals--by reading our PlainTalk(R) investment
guides.
* Find your next fund--by using the Compare Funds, Compare Costs, and Narrow
Your Fund Choices tools.
* Look up fund price, performance history, and distribution information--in a
snap. invest and manage accounts with ease
Log on to VANGUARD.COM to:
* See what you own (at Vanguard and elsewhere) and how your investments are
doing.
* Elect to receive online statements, fund reports (like this one),
prospectuses, and tax forms.
* Analyze your portfolio's holdings and performance.
* Open new accounts, buy and sell shares, and exchange money between
funds--securely and easily.
* Sign up to receive electronic newsletters from Vanguard informing you of
news on our funds, products, and services, as well as on investing and the
financial markets.
Find out what Vanguard.com can do for you. Log on today!
26
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. The contribution limits on IRAs were recently raised, making these
tax-deferred accounts more powerful options for retirement savers.
Here's how you can exploit your IRA--and improve your chances of having the
retirement of your dreams.
CONTRIBUTE THE MAXIMUM AMOUNT EACH YEAR
It may be an obvious point, but if you invest as much in your IRA as the law
allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you
are age 50 or over--you will increase the odds of meeting your retirement goals.
"Max out" every year you can.
MAKE IT AUTOMATIC
Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment
Plan. Your IRA contributions will be deducted from your bank account on a
schedule of your choosing, making retirement investing a healthy habit.
CONSIDER COST
The owners of low-cost investments keep a larger portion of their gross returns
than the owners of high-cost investments. Over the long term, avoiding costlier
mutual funds and brokerage commissions could significantly boost your retirement
savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice.
REQUEST A DIRECT ROLLOVER WHEN YOU CHANGE JOBS
Don't spend your retirement assets before you've retired. When you change jobs,
roll your 401(k) or other employer-sponsored retirement plan assets directly
into your IRA.
If you have questions about your IRA, want to transfer an IRA from another
institution to Vanguard, or need help with any other IRA transaction, call our
Retirement Resource Center at 1-800-205-6189 or visit VANGUARD.COM. You can open
or fund your IRA on our website and have a confirmation in your hand within
minutes.
27
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 sizable
personal 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
- ------------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee
(1954) Board, Chief of The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(112)
- ------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor
(1937) (112) to Greenwich Associates (international business strategy consulting);
January 2001 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 Trustee Chairman and Chief Executive Officer (since October 1999), Vice
(1945) (112) Chairman (JanuarySeptember 1999), and Vice President (prior to
December 2001 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; and Trustee of Drexel University.
- ------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (112) Executive Committee of Johnson & Johnson (pharmaceuticals/consumer
(1950) products); Director of the Medical Center at Princeton and Women's
July 1998 Research and Education Institute.
- ------------------------------------------------------------------------------------------------------------
BURTON G. MALKIEL TRUSTEE Chemical Bank Chairman's Professor of Economics,Princeton University;
(1932) (110) Director of Vanguard Investment Series plc (Irish invest-ment fund)
May 1977 (since November 2001), Vanguard Group (Ireland)Limited (Irish
investment management firm)(since November 2001),Prudential Insurance
Co. of America, BKF Capital (investment management), The Jeffrey Co.
(holding company), and NeuVis, Inc.(software company).
- ------------------------------------------------------------------------------------------------------------
the funds. Among board members' responsibilities are selecting investment
advisors for the funds; monitoring fund operations, performance, and costs;
reviewing contracts; nominating and selecting new trustees/directors; and
electing Vanguard officers.
Each trustee serves a fund until its termination; or until the trustee's
retirement, resignation, or death; or otherwise as specified in the fund's
organizational documents. Any trustee may be removed at a shareholders' meeting
by a vote representing two-thirds of the net asset value of all shares of the
fund together with shares of other Vanguard funds organized within the same
trust. The table on these two pages shows information for each trustee and
executive officer of the fund. The mailing address of the trustees and officers
is P.O. Box 876, Valley Forge, PA 19482.
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Alfred M. Rankin, Jr. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO
(1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of
January 1993 Goodrich Corporation (industrial products/aircraft systems and
services); Director of Standard Products Company (supplier for
the automotive industry) until 1998.
- ------------------------------------------------------------------------------------------------------------
J. Lawrence Wilson Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (112) (chemicals); Director of Cummins Inc. (diesel engines), The Mead
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceuti-cal
distribution); Trustee of Vanderbilt University.
- ------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. Gregory Barton Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (112) Secretary of The Vanguard Group and of each of the investment
June 2001 companies served by The Vanguard Group.
- ------------------------------------------------------------------------------------------------------------
Thomas J. Higgins Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the
(1957) (112) investment companies served by The Vanguard Group.
July 1998
- ------------------------------------------------------------------------------------------------------------
*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. MICHAEL S. MILLER, Planning and Development.
JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance.
KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer.
F. WILLIAM MCNABB, III, Client Relationship Group.
- ------------------------------------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
- ------------------------------------------------------------------------------------------------------------
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Vanguard IRA, PlainTalk, 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 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. 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) 2004 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q820 012004
ITEM 2: Code of Ethics. The Board of Trustees has adopted a code of ethics that
applies to the principal executive officer, principal financial officer,
principal accounting officer or controller of the Registrant and The Vanguard
Group, Inc., and to persons performing similar functions.
ITEM 3: Audit Committee Financial Expert. All of the members of the Audit
Committee have been determined by the Registrant's Board of Trustees to be Audit
Committee Financial Experts. The members of the Audit Committee are: Charles D.
Ellis, Rajiv L. Gupta, JoAnn Heffernan Heisen, Burton G. Malkiel, Alfred M.
Rankin, Jr., and J. Lawrence Wilson. All Audit Committee members are independent
under applicable rules.
ITEM 4: Not applicable.
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 Control Over Financial Reporting. There were no significant
changes in Registrant's internal control over financial reporting or in other
factors that could significantly affect this control subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 10: EXHIBITS. The following exhibits are attached hereto:
(a) code of ethics
(b) certifications
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: January 22, 2004
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: January 22, 2004
VANGUARD CONVERTIBLE SECURITIES FUND
BY:_____________(signature)________________
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: January 22, 2004
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.