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, 2003 - May 31, 2004
Item 1: Reports to Shareholders
VANGUARD(R) CONVERTIBLE SECURITIES FUND
SEMIANNUAL REPORT
MAY 31, 2004
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).
- --------------------------------------------------------------------------------
CONTENTS
1 letter from the chairman
5 report from the advisor
8 fund profile
9 glossary of investment terms
11 performance summary
12 about your fund's expenses
14 financial statements
23 advantages of vanguard.com
- --------------------------------------------------------------------------------
SUMMARY
* During the six months ended May 31, 2004, Vanguard Convertible Securities
Fund posted a return of 3.1%, which was somewhat lower than the returns of
its comparative measures.
* Financial markets across asset classes saw solid gains early in the period,
but gave up some of those gains in the final months.
* Convertible securities, which are often issued by small, rapidly growing
companies, were further hampered by the poor performance of these
companies' stocks relative to the broad market.
Want less clutter in your mailbox? Just register with VANGUARD.COM and opt to
get fund reports online.
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
Dear Shareholder,
The stock market made respectable gains during the recent fiscal half-year,
while bonds barely eked out a positive return. As you might expect, hybrid
investments posted results midway between those of stocks and bonds during the
six months ended May 31, 2004. Vanguard Convertible Securities Fund returned
3.1%, which was lower than the results of its comparative measures.
[PICTURE OF JOHN J. BRENNAN]
- ------------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
MAY 31, 2004
- ------------------------------------------------------
VANGUARD CONVERTIBLE SECURITIES FUND 3.1%
CS First Boston Convertibles Index 4.6
Average Convertible Securities Fund* 4.0
Dow Jones Wilshire 5000 Index 6.4
- ------------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table shows total returns (capital gains plus reinvested
distributions) for the fund and three benchmarks: the unmanaged Credit Suisse
First Boston Convertible Securities Index, the average mutual fund peer, and the
broad U.S. stock market, as measured by the Dow Jones Wilshire 5000 Composite
Index. The fund's starting and ending share prices and distributions to
shareholders are shown on page 4. As of May 31, the fund's yield was 2.72%, 101
basis points (1.01 percentage points) lower than at the start of the period.
As you know, on May 14 the Convertible Securities Fund was closed to new
accounts and to additional purchases for existing accounts. During the previous
12 months, fund assets had more than doubled as a result of both market
appreciation and new investments. Such rapid asset growth has the potential to
hamper an investment advisor's ability to put new cash to work effectively. The
challenge is even greater when the target market is a rarefied one, such as
convertibles, and when the investment advisor prefers a disciplined, bottom-up
approach to security
1
selection--as does Oaktree Capital Management, your fund's advisor. This is why,
to protect current shareholders, the fund's board of trustees decided to close
the Convertible Securities Fund.
STOCKS ROSE BUT WERE DOGGED BY INFLATIONARY FEARS
The fiscal half-year opened with strong returns in the domestic and foreign
stock markets as the bull market of 2003 spilled into January. As the economic
expansion gathered momentum, however, concern about inflation and rising oil
prices weighed on stock prices. Unrest in the Middle East and growing global
demand for oil pushed the per-barrel price past $40, a level not seen since
early in the Iran-Iraq War more than 20 years ago. In April, stock markets
retreated across the board.
For the six months, the broad U.S. stock market, as measured by the Dow Jones
Wilshire 5000 Index, returned 6.4%. That return was mirrored by the mid- to
large-capitalization stocks in the Russell 1000 Index; however, the Russell 2000
Index, a proxy for small-cap stocks, trailed with a 4.5% gain. Across the
market-cap spectrum, value-oriented stocks (those that generally trade at
below-market valuations relative to their book values and other fundamental
measures) posted better results than growth stocks (those expected to produce
above-average earnings growth).
For investors in the United States, international stocks continued to provide
even better returns than the domestic market, a result of the relative weakness
of the U.S. dollar and the solid gains of stocks in Europe and Japan.
STRENGTHENING ECONOMY PUSHED BOND YIELDS HIGHER
In the fixed income markets, interest rates rose sharply in April in response to
signs of higher inflation. Over the six months ended May 31, the yield of the
benchmark 10-year U.S. Treasury note increased 32 basis points to 4.65%. The
Lehman Brothers Aggregate Bond Index, which covers the taxable investment-grade
bond market, returned just 0.6%, with income offsetting the price drop that
accompanies rising rates for bonds.
The yields of many short-term issues also rose in expectation of actions by the
Federal Reserve Board to boost interest rates, but for the shortest-
2
- --------------------------------------------------------------------------------
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED MAY 31, 2004
---------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
STOCK
Russell 1000 Index (Large-caps) 6.4% 18.9% -1.0%
Russell 2000 Index (Small-caps) 4.5 30.3 6.7
Dow Jones Wilshire 5000 Index 6.4 20.5 -0.5
(Entire market)
MSCI All Country World Index
ex USA (International) 9.6 33.2 1.4
- --------------------------------------------------------------------------------
BOND
Lehman Aggregate Bond Index 0.6% -0.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index -0.2 0.0 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.2
================================================================================
CPI
Consumer Price Index 2.5% 3.1% 2.6%
- --------------------------------------------------------------------------------
*Annualized.
term securities--those held by money market funds--yields were relatively
stable. These securities respond more to Fed actions than to market
expectations. The yield of the 3-month Treasury bill, a proxy for money market
rates, started the half-year at 0.93% and ended at 1.06%.
A BELL-SHAPED PERFORMANCE CURVE FOR YOUR FUND
On the way to its 3.1% six-month return, the Convertible Securities Fund
experienced considerable volatility. The fund made strong gains in December and
January, but gave up some of those gains during the last two months of the
period. To an extent, that pattern mirrored what was happening in both the stock
and bond markets. Convertibles, by their nature, are linked to the performance
of the issuers' common stocks.
Your fund lagged the average return of competitors by 0.9 percentage point, a
gap largely attributable to the nature of its holdings. As its name implies, the
fund invests almost exclusively in convertible bonds and convertible preferred
stocks. This is in sharp contrast to many of its peers. Indeed, according to
fund-tracker Morningstar, the average convertibles fund at the end of 2003 had
13% of its assets in common stocks. Your fund's disciplined focus on hybrid
securities can place it at a disadvantage when common stocks outperform other
asset classes, and particularly when small-cap growth stocks are lagging the
broad equity market, as they did during the fiscal half-year. Convertibles are
typically issued by small, growing companies.
The fund lagged its benchmark index by a wider margin of 1.5 percentage points,
largely as a result of security selection. We do not read too much into a track
record of just six months, whether the record is stellar or subpar. In three of
the past four fiscal years, your fund outpaced its benchmark by much wider
margins. And the fund has outperformed its
3
average peer over the past decade. We believe that the proven skills of the
investment advisor, together with Vanguard's low costs, will help the fund
continue to post competitive returns over the long run.
For more information about the fund's performance and its individual securities,
please see the Report from the Advisor that begins on page 5.
NEW CONCERNS, SAME ADVICE
Not long ago, in the punishing bear market, we were counseling investors not to
give up on stocks. Today, investor apprehension seems to have relocated to the
bond market, but our message is the same. The best response to the ever-changing
risks of the financial markets is to develop a plan and stick with it. A
sensible plan includes a mix of stock, bond, and money market funds weighted in
proportions appropriate to your unique circumstances. When a tough period
strikes one asset class, some of the pain can be offset by better performance in
another. Over time, this simple, balanced approach puts you in a good position
to meet your financial goals. Vanguard Convertible Securities Fund, with its
hybrid nature, can play a useful role, adding another layer of diversification
to such a balanced portfolio.
Thank you for entrusting your assets to us.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
JUNE 14, 2004
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE NOVEMBER 30, 2003-MAY 31, 2004
DISTRIBUTIONS PER SHARE
------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Convertible Securities Fund $13.05 $13.22 $0.23 $0.00
- --------------------------------------------------------------------------------
4
REPORT FROM THE ADVISOR
Vanguard Convertible Securities Fund achieved a reasonable absolute return
during the first half of fiscal 2004, although our 3.1% gain fell slightly short
of the 4.6% returned by our primary benchmark, the CS First Boston Convertibles
Index. This shortfall was due to the underperformance of a few overweighted
positions in the latter part of the six-month period. The absence from the fund
of a few of the index's top-weighted holdings was also a factor, since these
securities performed better than expected, especially toward the end of the
period. Overall, though, we are pleased with the fund's result during what was a
very volatile market environment.
THE INVESTMENT ENVIRONMENT
Fiscal 2004 began where fiscal 2003 left off, with positive investor sentiment
for equities and lower interest rates combining to lift the prices of most
convertible securities. The beginning of the period was very positive for most
equities, with the Nasdaq Composite and Russell 2000 Indexes, in particular,
advancing strongly. During this time, convertibles from technology and
telecommunications firms were the top performers, with names like Lucent
Technologies, Nortel Networks, and Juniper Networks leading the way. Investors
also exhibited a preference for small-capitalization companies, and
speculative-grade convertibles easily bested the investment-grade sector. On the
fixed income side, interest rates declined slightly while credit spreads
remained quite narrow; these factors boosted the prices of many convertibles.
Nearly all of our return for the fiscal half-year came while this favorable
environment existed.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
However, the surge in investor optimism was short-lived, as a variety of
negative factors began to affect the financial markets beginning in March:
Interest rates rose, credit spreads increased,
5
oil prices increased to all-time highs, and the threat of terrorism intensified.
These and other concerns caused a significant retreat in investor sentiment and
had a negative effect on all convertibles, including most of our holdings.
Despite this roller-coaster investing environment, your fund performed
reasonably well, as our selling discipline and careful new-issue selection
allowed us to avoid several unfavorable situations.
Even with the negative market overtones, demand for convertible securities
remained strong in recent months, with interest coming from a wide variety of
investors. As a result of the demand, we found the pricing of many new
convertibles unattractive in terms of both yield and conversion premiums. The
size of the average new issue also declined, as very few large-cap companies
issued convertibles.
On the positive side, call protection became quite generous, and many
convertibles provided short- to intermediate-dated put features. In addition,
dividend-protection language became standard in response to the large number of
companies initiating or increasing their dividends on common stock. This
language is beneficial to convertibles investors because dividend increases on
the underlying common stock can have a negative impact on the valuation of a
convertible security. While we declined to participate in many new deals, we did
invest in offerings from Fisher Scientific International, Freeport-McMoRan
Copper & Gold, CP Ships, and Chesapeake Energy. We expect the issuance of new
convertible securities to be moderate during the next few months.
THE FUND'S SUCCESSES
Some of our top performers were convertibles from Fisher Scientific, Celgene,
J.C. Penney, and American Tower. Fisher is our top-weighted holdings, and we
remain very positive about its underlying equity story; we enjoy balanced
convertible exposure to it through our investments in both of the firm's
convertible bonds. Other securities that performed relatively well over the six
months include Royal Caribbean Cruises, Reliant Resources, and Flir Systems.
THE FUND'S SHORTFALLS
Several investments had disappointing results, primarily in the latter half of
the period, as negative developments affected their value.
6
One high-profile disappointment was our position in the Nortel 4.25% converts,
which mature in September 2008. These bonds declined after the company announced
problems in its accounting practices and fired its CEO and CFO. Valeant
Pharmaceuticals International declined after reporting lackluster earnings. The
fund's limited airline industry exposure also was unrewarding, as the escalating
price of oil hurt airlines' near-term profitability. We continue to believe in
American Airlines and Continental Airlines as long-term investments.
OUR POSITION
As usual, outside of a small short-term reserve, the portfolio consists entirely
of convertibles--in a mix of 83% convertible bonds and 11% convertible
preferreds--with no common stocks or other nonconvertible securities as of the
end of the period. We remain positive about the investing environment and
believe we are well positioned to continue to achieve the fund's objectives.
Larry Keele, PORTFOLIO MANAGER
OAKTREE CAPITAL MANAGEMENT, LLC
June 16, 2004
7
FUND PROFILE
AS OF 05/31/2004
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 and 10.
CONVERTIBLE SECURITIES FUND
- --------------------------------------------
PORTFOLIO CHARACTERISTICS
Number of Securities 104
Yield 2.7%
Conversion Premium 51.2%
Average Weighted Maturity 5.0 years
Average Coupon 3.3%
Average Quality BB-
Average Duration 4.4 years
Foreign Holdings 14.6%
Turnover Rate 110%*
Expense Ratio 0.71%*
Short-Term Reserves 5%
- --------------------------------------------
- --------------------------------
DISTRIBUTION BY CREDIT QUALITY
(% OF FIXED INCOME PORTFOLIO)
Aaa/AAA 0%
Aa/AA 0
A/A 7
Baa/BBB 19
Ba/BB 5
B/B 36
Below B/B 15
Not Rated 18
- --------------------------------
Total 100%
- --------------------------------
- --------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Fisher Scientific International Inc. 4.5%
(retail)
Teva Pharmaceutical Industries, Ltd. 3.5
(pharmaceuticals)
Freeport-McMoRan Copper & Gold, Inc. 3.0
(metals & mining)
Tyco International Group SA 3.0
(conglomerate)
Invitrogen, Inc. 3.0
(pharmaceuticals)
Cephalon, Inc. 2.9
(pharmaceuticals)
Sealed Air Corp. 2.8
(industrial manufacturing)
Schlumberger Ltd. 2.6
(energy & utilities)
Valeant Pharmaceuticals International 2.1
(pharmaceuticals)
Veeco Instruments, Inc. 2.0
(electronics)
- --------------------------------------------
Top Ten 29.4%
- --------------------------------------------
"Ten Largest Holdings" excludes any temporary cash investments and equity index
products.
- ---------------------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
- ---------------------------------------------------
R-Squared 0.67 1.00
Beta 0.53 1.00
- ---------------------------------------------------
- ------------------------------------------------------
DISTRIBUTION BY MATURITY (% OF FIXED INCOME PORTFOLIO)
Under 1 Year 0%
1-5 Years 58
5-10 Years 42
10-20 Years 0
20-30 Years 0
Over 30 Years 0
- ------------------------------------------------------
Total 100%
- ------------------------------------------------------
*Annualized.
**Dow Jones Wilshire 5000 Index.
VISIT OUR WEBSITE AT VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
8
- ---------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
Auto & Transportation 10%
Consumer Discretionary 14
Financial Services 8
Health Care 19
Other Energy 9
Materials & Processing 9
Producer Durables 0
Technology 18
Utilities 5
Other 3
Short-Term Reserves 5%
- ---------------------------------------
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.
- --------------------------------------------------------------------------------
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%.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
9
GLOSSARY OF INVESTMENTS TERMS (CONTINUED)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
CONVERSION PREMIUM. The average percentage by which the weighted average market
price of the convertible securities held by a fund exceeds the weighted average
market price of their underlying common stocks. For example, if a stock is
trading at $25 per share and a bond convertible into the stock is trading at a
price equivalent to $30 per share of stock, the conversion premium is 20% ($5 /
$25 = 20%).
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
10
PERFORMANCE SUMMARY
AS OF 5/31/2004
All of the returns in this report represent past performance, which is not a
guarantee of future results that may be achieved by the fund. (For the most
recent performance, which may be higher or lower than that cited, visit our
website at www.vanguard.com.) Note, too, that both investment returns and
principal value can fluctuate widely, so an investor's shares, when sold, 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 sale of fund
shares.
CONVERTIBLE SECURITIES FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) NOVEMBER 30, 1993-MAY 31, 2004
CONVERTIBLE CS FIRST BOSTON
SECURITIES FUND CONVERTIBLE INDEX
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 28.1 23.7
2004* 3.1 4.6
- --------------------------------------------------------------------------------
*Six months ended May 31, 2004.
NOTE: See Financial Highlights table on page 20 for dividend and capital gains
information.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2004
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 34.21% 10.77% 5.20% 4.52% 9.72%
- --------------------------------------------------------------------------------
11
ABOUT YOUR FUND'S EXPENSES
We believe it is important for you to understand the impact of costs on your
investment. All mutual funds have operating expenses. As a shareholder of the
fund, you incur ongoing costs, which 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 average net assets. This
figure is known as the expense ratio. The following examples are intended to
help you understand the ongoing costs (in dollars) of investing in your fund and
to compare these costs with those of other mutual funds. The examples are based
on an investment of $1,000 made at the beginning of the period shown and held
for the entire period.
The table below illustrates your fund's costs in two ways:
* ACTUAL FUND RETURN. This section helps you to estimate the actual expenses
that you paid over the period. The "Ending Account Value" shown is derived
from the fund's actual return, and the third column shows the dollar amount
that would have been paid by an investor who started with $1,000 in the
fund. You may use the information here, together with the amount you
invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number given for your fund under the heading "Expenses Paid During
Period."
* Hypothetical 5% return. This section is intended to help you compare your
fund's costs with those of other mutual funds. It assumes that the fund had
a return of 5% before expenses during the period shown, but that the
expense ratio is unchanged. In this case--because the return used is not
the fund's actual return--the results do not apply to your investment. The
example is useful in making comparisons because the Securities and Exchange
Commission requires all mutual funds to calculate expenses based on a 5%
return. You can assess your fund's costs by comparing this hypothetical
example with the hypothetical examples that appear in shareholder reports
of other funds.
- --------------------------------------------------------------------------------
SIX MONTHS ENDED MAY 31, 2004
BEGINNING ENDING EXPENSES
CONVERTIBLE ACCOUNT VALUE ACCOUNT VALUE PAID DURING
SECURITIES FUND 11/30/2003 5/31/2004 PERIOD*
- --------------------------------------------------------------------------------
Actual Fund Return $1,000 $1,031 $3.61
Hypothetical 5% Return 1,000 1,046 3.63
- --------------------------------------------------------------------------------
*Expenses are equal to the fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in the
most recent fiscal half-year, then divided by 366.
Note that the expenses shown in the table are meant to highlight and help you
compare ongoing costs only and do not reflect any transactional costs or account
maintenance fees. They do not include your fund's low-balance fee, described in
the prospectus. If this fee were applied to your account, your costs would be
higher. Your fund does not charge transaction fees, such as purchase or
redemption fees, nor does it carry a "sales load."
12
- -------------------------------------------------------------
ANNUALIZED EXPENSE RATIOS:
YOUR FUND COMPARED WITH ITS PEER GROUP
AVERAGE
CONVERTIBLE
SECURITIES
FUND FUND
- -------------------------------------------------------------
Convertible Securities Fund 0.71% 1.64%*
- -------------------------------------------------------------
Peer-group expense ratio is derived from data provided by Lipper Inc. and
captures information through year-end 2003.
The calculations assume no shares were bought or sold during the period. Your
actual costs may have been higher or lower, depending on the amount of your
investment and the timing of any purchases or redemptions.
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 appropriate fund prospectus.
13
FINANCIAL STATEMENTS (UNAUDITED)
AS OF 5/31/2004
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 (83.4%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (9.9%)
American Airlines
4.25%, 9/23/2023 $ 16,345 $ 14,751
Continental Airlines, Inc.
4.50%, 2/1/2007 17,300 12,802
(1) 5.00%, 6/15/2023 1,240 1,018
CP Ships Ltd.
(1) 4.00%, 6/30/2024 18,655 19,215
General Motors Corp.
5.25%, 3/6/2032 754 18,350
Lear Corp.
0.00%, 2/20/2022 18,730 9,623
Mesa Air Group Inc.
(1) 2.482%, 6/16/2023 6,250 2,758
Navistar Financial Corp.
4.75%, 4/1/2009 17,600 17,160
Northwest Airlines Corp.
(1) 7.625%, 11/15/2023 12,890 10,070
-------------
$ 105,747
-------------
CONSUMER DISCRETIONARY (12.6%)
Charming Shoppes, Inc.
4.75%, 6/1/2012 2,960 3,397
Citadel Broadcasting Co.
(1) 1.875%, 2/15/2011 4,375 3,894
The Walt Disney Co.
2.125%, 4/15/2023 11,930 12,482
Echostar Communications Corp.
5.75%, 5/15/2008 4,795 4,885
Fairmont Hotels
(1) 3.75%, 12/1/2023 13,365 13,098
IKON Office Solutions, Inc.
(1) 5.00%, 5/1/2007 1,600 1,686
Lamar Advertising Co.
2.875%, 12/31/2010 10,320 10,836
Liberty Media Corp.
(1) 0.75%, 3/30/2023 11,180 12,536
Lowe's Cos., Inc.
0.861%, 10/19/2021 10,030 10,293
Memberworks, Inc.
(1) 5.50%, 10/1/2010 5,330 5,430
NCO Group, Inc.
4.75%, 4/15/2006 8,407 8,638
News America Inc.
0.00%, 2/28/2021 18,080 10,373
Aristocrat Leisure Ltd.
5.00%, 5/31/2006 7,300 7,738
Shuffle Master, Inc.
(1) 1.25%, 4/15/2024 7,300 7,501
Sirius Satellite Radio
(1) 2.50%, 2/15/2009 10,600 10,454
Triarc Cos., Inc.
(1) 5.00%, 5/15/2023 4,448 4,543
5.00%, 5/15/2023 1,520 1,552
14
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
Waste Connections, Inc.
1.678%, 5/1/2022 $ 4,635 $ 5,000
-------------
$ 134,336
-------------
FINANCIAL SERVICES (4.8%)
HCC Insurance Holdings, Inc.
1.30%, 4/1/2023 13,780 14,882
Meristar Hospitality Corp.
9.50%, 4/1/2010 6,420 7,664
Ohio Casualty Corp.
5.00%, 3/19/2022 15,545 16,109
Providian Financial Corp.
3.25%, 8/15/2005 7,290 7,117
United Rentals NA Inc.
(1) 1.875%, 10/15/2023 5,700 5,379
-------------
$ 51,151
-------------
HEALTH CARE (18.8%)
Cephalon, Inc.
2.50%, 12/15/2006 22,590 21,828
0.00%, 6/15/2033 8,215 8,595
Community Health Systems, Inc.
4.25%, 10/15/2008 18,300 18,758
Connetics Corp.
2.25%, 5/30/2008 9,630 11,135
Decode Genetics, Inc.
(1) 3.50%, 4/15/2011 3,620 3,462
Imclone Systems
(1) 1.375%, 5/15/2024 9,310 10,032
Invitrogen Inc.
2.25%, 12/15/2006 30,645 31,718
Oscient Pharmaceuticals
(1) 3.50%, 4/15/2011 2,055 2,016
Sunrise Assisted Living, Inc.
(1) 5.25%, 2/1/2009 1,570 1,839
5.25%, 2/1/2009 13,430 15,730
Teva Pharmaceutical Finance II
0.25%, 2/1/2024 24,035 25,357
0.50%, 2/1/2024 11,415 11,815
Valeant Pharmaceuticals International
(1) 3.00%, 8/16/2010 14,160 12,903
(1) 4.00%, 11/15/2013 10,425 9,604
Wyeth
(1) 0.716%, 7/15/2004 15,930 15,691
-------------
$ 200,483
-------------
OTHER ENERGY (6.1%)
Hanover Compressor Co.
4.75%, 3/15/2008 3,240 3,013
4.75%, 1/15/2014 3,970 4,183
Massey Energy Co.
(1) 2.25%, 4/1/2024 11,445 11,774
Reliant Resources, Inc.
(1) 5.00%, 8/15/2010 14,040 18,585
Schlumberger Ltd.
1.50%, 6/1/2023 27,035 27,609
-------------
$ 65,164
-------------
MATERIALS & PROCESSING (5.9%)
Fluor Corp.
1.50%, 2/15/2024 19,140 18,853
Graftech International
(1) 1.625%, 1/15/2024 16,355 14,106
Sealed Air Corp.
(1) 3.00%, 6/30/2033 29,935 29,898
-------------
$ 62,857
-------------
PRODUCER DURABLES (0.2%)
Lam Research Corp.
4.00%, 6/1/2006 1,725 1,738
TECHNOLOGY (17.3%)
ADC Telecommunications, Inc.
1.00%, 6/15/2008 2,815 2,674
Axcelis Technologies
4.25%, 1/15/2007 9,865 9,728
CIBER INC.
(1) 2.875%, 12/15/2023 14,755 14,405
Commscope Inc.
(1) 1.00%, 3/15/2024 10,350 10,415
EDO Corp.
(1) 5.25%, 4/15/2007 745 765
5.25%, 4/15/2007 1,000 1,028
EMC Corp.
(1) 4.50%, 4/1/2007 2,760 3,022
FEI Co.
(1) 0.00%, 6/15/2023 3,000 3,364
0.00%, 6/15/2023 190 213
Flir Systems, Inc.
(1) 3.00%, 6/1/2023 8,515 11,304
3.00%, 6/1/2023 3,115 4,135
Fisher Scientific International Inc.
(1) 2.50%, 10/1/2023 16,720 23,492
2.50%, 10/1/2023 910 1,279
3.25%, 3/1/2024 22,775 23,458
HNC Software Inc.
5.25%, 9/1/2008 755 804
International Rectifier Corp.
4.25%, 7/15/2007 15,705 15,273
15
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
LSI Logic
(1) 4.00%, 5/15/2010 $ 8,655 $ 8,980
4.00%, 5/15/2010 1,740 1,805
Mercury Computer Systems
(1) 2.00%, 5/1/2009 8,010 8,150
Nortel Networks Corp.
4.25%, 9/1/2008 11,655 10,519
Photronics, Inc.
4.75%, 12/15/2006 1,386 1,377
Serena Software, Inc.
(1) 1.50%, 12/15/2023 2,130 2,435
Solectron Corp.
(1) 0.50%, 2/15/2034 4,225 3,538
Veeco Instruments, Inc.
4.125%, 12/21/2008 21,709 21,818
-------------
$ 183,981
-------------
UTILITIES (4.8%)
American Tower Corp.
(1) 3.25%, 8/1/2010 8,430 11,560
3.25%, 8/1/2010 3,940 5,403
Mediacom Communications Corp.
5.25%, 7/1/2006 3,650 3,458
NII Holdings
(1) 2.875%, 2/1/2034 10,500 10,671
Primus Telecommunications Group, Inc.
(1) 3.75%, 9/15/2010 2,415 2,433
3.75%, 9/15/2010 1,325 1,334
5.75%, 2/15/2007 11,305 10,754
Quanta Services, Inc.
(1) 4.50%, 10/1/2023 5,535 5,237
-------------
$ 50,850
-------------
OTHER (3.0%)
Tyco International Group SA
(1) 2.75%, 1/15/2018 16,580 23,544
2.75%, 1/15/2018 5,850 8,307
-------------
$ 31,851
-------------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $878,874) $ 888,158
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (11.3%)
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (1.3%)
Interpublic Group
5.375% Cvt. Pfd. 203,300 $ 10,698
Emmis Communications Corp.
6.25% Cvt. Pfd. 63,300 2,900
-------------
$ 13,598
-------------
FINANCIAL SERVICES (3.1%)
Conseco Inc.
5.50% Cvt. Pfd. 334,600 8,700
Commerce Capital
5.95% Cvt. Pfd. 119,500 7,678
(1) 5.95% Cvt. Pfd. 31,400 2,017
Reinsurance Group of America
5.75% Cvt. Pfd. 65,000 3,702
United Rentals
6.50% Cvt. Pfd. 171,100 7,421
Washington Mutual, Inc.
(1) 5.375% Cvt. Pfd. 58,000 3,346
-------------
$ 32,864
-------------
OTHER ENERGY (2.7%)
Chesapeake Energy Corp.
(1) 4.125% Cvt. Pfd. 13,900 13,970
5.00% Cvt. Pfd. 66,100 6,924
Hanover Compressor Capital Trust
7.25% Cvt. Pfd. 168,200 7,863
-------------
$ 28,757
-------------
MATERIALS & PROCESSING (3.0%)
Freeport-McMoRan Copper & Gold, Inc.
(1) 5.50% Cvt. Pfd. 35,400 31,993
TECHNOLOGY (1.0%)
Lucent Technologies Capital Trust I
7.75% Cvt. Pfd. 9,600 10,960
UTILITIES (0.2%)
Dominion Resources, Inc.
9.50% Cvt. Pfd. 46,900 2,548
-------------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $117,821) $ 120,720
- --------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (27.0%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.03%, 6/1/2004 $ 57,789 $ 57,789
1.03%, 6/1/2004--Note F 229,766 229,766
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $287,555) $ 287,555
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (121.7%)
(Cost $1,284,250) $ 1,296,433
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-21.7%)
- --------------------------------------------------------------------------------
Other Assets--Note C 15,118
Security Lending Collateral
Payable to Brokers--Note F (229,766)
Other Liabilities (16,493)
-------------
$ (231,141)
-------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 80,601,080 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 1,065,292
================================================================================
NET ASSET VALUE PER SHARE $ 13.22
================================================================================
*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, 2004, the aggregate value
of these securities was $422,133,000, representing 40.0% of net assets.
- -------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------
AT MAY 31, 2004, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------
Paid-in Capital $ 1,010,565 $ 12.54
Undistributed Net
Investment Income 4,843 .06
Accumulated Net
Realized Gains 37,701 .47
Unrealized Appreciation 12,183 .15
- -------------------------------------------------------------------
NET ASSETS $ 1,065,292 $ 13.22
===================================================================
See Note D in Notes to Financial Statements for the tax-basis components of net
assets.
17
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, 2004
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 2,928
Interest 15,802
Security Lending 319
- --------------------------------------------------------------------------------
Total Income $ 19,049
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,822
Performance Adjustment 442
The Vanguard Group--Note C
Management and Administrative 1,254
Marketing and Distribution 63
Custodian Fees 8
Shareholders' Reports 13
Trustees' Fees and Expenses 1
- --------------------------------------------------------------------------------
Total Expenses $ 3,603
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 15,446
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 53,708
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES (52,747)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 16,407
================================================================================
18
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, 2004 NOV. 30, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 15,446 $ 19,841
Realized Net Gain (Loss) 53,708 61,788
Change in Unrealized Appreciation
(Depreciation) (52,747) 59,263
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 16,407 140,892
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (16,127) (16,869)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (16,127) (16,869)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 392,028 515,418
Issued in Lieu of Cash Distributions 13,735 14,331
Redeemed (157,941) (127,279)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 247,822 402,470
- --------------------------------------------------------------------------------
Total Increase (Decrease) 248,102 526,493
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 817,190 290,697
- --------------------------------------------------------------------------------
End of Period $ 1,065,292 $ 817,190
================================================================================
1Shares Issued (Redeemed)
Issued 28,733 44,868
Issued in Lieu of Cash Distributions 1,032 1,265
Redeemed (11,807) (10,983)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares
Outstanding $ 17,958 $ 35,150
================================================================================
19
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 ENDED YEAR ENDED NOVEMBER 30,
MAY 31, ---------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $13.05 $10.57 $12.12 $12.68 $13.18 $11.10
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .20 .41 .47 .53 .56 .52
Net Realized and Unrealized Gain (Loss)
on Investments .20 2.48 (1.53) (.04) .19 2.13
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations .40 2.89 (1.06) .49 .75 2.65
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.41) (.49) (.54) (.55) (.57)
Distributions from Realized Capital Gains . -- . -- . -- (.51) (.70) . --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (.23) (.41) (.49) (1.05) (1.25) (.57)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.22 $13.05 $10.57 $12.12 $12.68 $13.18
==============================================================================================================
TOTAL RETURN 3.06% 28.07% -8.88% 3.98% 5.27% 24.85%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,065 $817 $291 $300 $323 $180
Ratio of Total Expenses to Average Net Assets* 0.71%** 0.84% 0.95% 0.71% 0.56% 0.55%
Ratio of Net Investment Income to
Average Net Assets 3.03%** 3.82% 4.27% 4.21% 4.19% 4.30%
Portfolio Turnover Rate 110%** 127% 118% 156% 182% 162%
==============================================================================================================
* Includes performance-based investment advisory fee increases (decreases) of
0.09%, 0.13%, 0.21%, 0.01%, (0.14%), and (0.22%).
**Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
20
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, 2004, the
investment advisory fee represented an effective annual basic rate of 0.36% of
the fund's average net assets before an increase of $442,000 (0.09%) 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, 2004, the fund had contributed capital of $166,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.17% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
D. 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.
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, 2003, the fund had available
realized losses of $16,034,000 to offset future net capital gains 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, 2004; should
the fund realize net capital losses for the year, the losses will be added to
the loss carryforward balance above.
At May 31, 2004, net unrealized appreciation of investment securities for tax
purposes was $12,183,000, consisting of unrealized gains of $44,765,000 on
securities that had risen in value since their purchase and $32,582,000 in
unrealized losses on securities that had fallen in value since their purchase.
E. During the six months ended May 31, 2004, the fund purchased $737,419,000 of
investment securities and sold $522,401,000 of investment securities, other than
temporary cash investments.
F. The market value of securities on loan to broker/dealers at May 31, 2004, was
$222,828,000, for which the fund held cash collateral of $229,766,000. 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.
22
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!
23
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 of
(1954) Board, Chief The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(129)
- ------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor
(1937) (129) 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) (129) Chairman (January-September 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 (commu-
nications components); Board Member of the American Chemistry
Council; Trustee of Drexel University.
- ------------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/
(1950) consumer products); Director of the University Medical Center at
July 1998 Princeton and Women's Research and Education Institute.
- ------------------------------------------------------------------------------------------------------------------
BURTON G. MALKIEL Trustee Chemical Bank Chairman's Professor of Economics, Princeton
(1932) (127) University; Director of Vanguard Investment Series plc (Irish invest-
May 1977 ment fund) (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) (129) 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) (129) (chemicals); Director of Cummins Inc. (diesel engines), The Mead
April 1985 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.;
(1951) (129) 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) (129) 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, 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.
You can obtain a free copy of Vanguard's proxy voting guidelines by visiting our
website, www.vanguard.com, and searching for "proxy voting guidelines," or by
calling 1-800-662-2739. They are also available from the SEC's website,
www.sec.gov.
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.
Q822 072004
Item 2: Not applicable.
Item 3: Not applicable.
Item 4: Not applicable.
Item 5: Not applicable.
Item 6: Not applicable.
Item 7: Not applicable.
Item 8: Not applicable.
Item 9: Not applicable.
Item 10: 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 11: Exhibits.
(a) 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: July 23, 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: July 23, 2004
VANGUARD CONVERTIBLE SECURITIES FUND
BY: (signature)
----------------------------------------
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: July 23, 2004
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.