[GRAPHIC SHIP LOGO VANGUARD(R)]
May 20, 2005
Christian Sandoe, Esq.
Division of Investment Management
U.S. Securities and Exchange Commission via electronic filing
450 Fifth Street,
N.W., Fifth Floor
Washington, D.C. 20549
Re: Vanguard Specialized Funds
File No. 811-3916
Dear Mr. Sandoe:
The following responds to your comments of May 13, 2005 on the
post-effective amendment of the Vanguard Specialized Funds (the "Registrant")
registration statement on Form N-1A. You commented on PEA number 50 that was
filed on March 30, 2005 pursuant to Rule 485(a). Note that each prospectus page
reference is to the Investor and Admiral Shares versions of the prospectuses.
COMMENT 1: VANGUARD DIVIDEND GROWTH FUND (PROSPECTUS PAGE 1)
COMMENT: In the discussion of "Investment Style Risk" in the Primary Risks
section, there is a reference to the primary risk that "dividend-paying
large-capitalization stocks will trail returns from the overall stock
market." Indicate in the Primary Investment Strategies section that the
fund invests primarily in large-cap stocks.
RESPONSE: The Divided Growth Fund, as well as the sector-specific series funds
of the Registrant, do not have specific market-capitalization strategies
and will invest across all market-capitalization segments. They will not
focus on any particular market segment at any particular time for any
reason other than to focus on their stated primary investment strategies
and objectives. As such, we believe that it would be misleading to
characterize a specific market cap as a part of the fund's primary
investment strategies. Given that the fund's managers generally do not take
market capitalization into account as a portfolio management strategy, we
have removed the reference to "large-capitalization" from the fund's
Primary Risks section. (See our response to your fourth comment for further
discussion.)
COMMENT 2: VANGUARD DIVIDEND GROWTH FUND (PROSPECTUS PAGE 1)
COMMENT: The third sentence of the Primary Investment Strategies section of the
prospectus states, "[T]hese stocks typically--but not always--will be
trading at a discount to the market at the time of purchase." Clarify what
the phrase "discount to the market" means.
RESPONSE: We have revised the disclosure as follows to clarify what "discount to
the market" means: "These stocks typically--but not always--will be
undervalued relative to the market and will show potential for increasing
dividends."
Christian Sandoe, Esq.
May 20, 2005
Page 2
COMMENT 3A: VANGUARD ENERGY FUND (PROSPECTUS PAGE 1)
COMMENT: You indicated that you would like to "narrow" the definition of
"energy-related activities," for purposes of defining what types of
energy-related securities are suggested by the Energy Fund's name. To the
extent applicable, this comment applies to each series of the Registrant.
RESPONSE: As discussed in our response to comment 3B, we believe that each
fund's current disclosure complies with Form N-1A and gives shareholders
the information that they need to understand what types of securities each
fund invests in.
COMMENT 3B: VANGUARD ENERGY FUND (PROSPECTUS PAGE 1)
COMMENT: You noted that the phrase "such as," as it is used in the Energy Fund's
Primary Investment Strategies section, indicates that the list of
energy-related activities is not exhaustive. You also noted that it is not
clear if "energy conservation" and "pollution control" are energy-related
activities that could be suggested by the fund's name. To the extent
applicable, this comment applies to each series of the Registrant.
RESPONSE: Specific information about the types of companies in which the funds
invest is disclosed in both the Primary Investment Strategies and "More on
the Funds" sections of each prospectus. For example, the Vanguard Energy
Fund prospectus states that the fund invests in companies principally
engaged in energy-related activities such as production and transmission of
energy or energy fuels; the making of component products for such
activities; energy research; and energy conservation or pollution control.
The funds' advisors neither employ a specific percentage-of-income test
when determining whether a particular company is "principally engaged" in a
specific industry, nor are they required to. As you can see by a review of
the Energy Fund's most recent Statement of Net Assets, far more than 80% of
the fund's assets are invested in stocks of companies that are "principally
engaged" in energy-related activities that are disclosed in the prospectus.
The fund's most recent Statement of Net Assets can be found on EDGAR at the
following web address:
www.sec.gov/Archives/edgar/data/734383/000093247105000619/formncsr.htm
We believe that stocks of companies that are principally engaged in energy
conservation and pollution control are reasonably related to the types of stocks
suggested by the Energy Fund's name.
COMMENT 4: VANGUARD ENERGY (PROSPECTUS PAGE 1)
COMMENT: Disclose the market-capitalization strategy of the Vanguard Energy
Fund, and disclose the specific risks of the market-capitalization
strategy. To the extent applicable, this comment applies to each series of
the Registrant.
RESPONSE: As noted in our response to your first comment, the Vanguard Energy
Fund, as well as the sector-specific series funds of the Registrant, do not
have specific market-capitalization strategies and will invest across all
market capitalization segments. They will not focus on any particular
market segment at any particular time for any reason other than to focus on
their stated primary investment strategies and objectives. As such, we
believe that it would be misleading to characterize a specific market cap
as a part of the primary investment strategies, or a particular market cap
risk as a primary risk of investing in the funds. In actuality, industry
concentration, manager, foreign investment (to the extent applicable), and
general stock market risk will be the primary drivers of each fund's
Christian Sandoe, Esq.
May 20, 2005
Page 3
performance relative to the broad U.S. stock market, not a particular
market-cap exposure.
Furthermore, we have disclosed each fund's median market
capitalization. However, investors are ill-served by disclosure of a fund's
market capitalization range in a prospectus for the following reasons:
(1) Market capitalization ranges are subjective over
different time periods and among different investment advisors
and funds. Defining a particular market capitalization as a
specific dollar range could confuse investors because the
dollar ranges are so varied over time and among advisors and
funds.
(2) Ranges change continually because of fluctuations in
stock market valuations. Therefore, disclosure of one range in
a prospectus could be misleading when the stock market
fluctuates.
(3) A fund's overall market capitalization range can be
very broad1 and not indicative of where the fund's overall
market capitalization focus is. The median market
capitalization is a more useful piece of information for
investors concerned with market capitalization.
(4) We believe it is particularly inappropriate to
disclose a market capitalization range when a fund does not
have a specific investment strategy with respect to market
capitalization. The Vanguard Energy and Precious Metals and
Mining Funds, for example, have investment strategies that
focus on particular industries and not on particular market
capitalization ranges. We believe that disclosure of the
market capitalization range would draw undue attention to a
fund characteristic that is not generally considered by the
advisor. Indeed, such disclosure could cause investors to
believe that a company's market capitalization plays a
significant role in the advisor's decision to buy or sell the
company stock, when this is not the case.
(5) Form N-1A does not require funds to disclose specific
market capitalization dollar ranges, particularly when a fund
has no particular strategy or policy with respect to them.
In future filings we will, if appropriate, move the
market capitalization disclosure out of the prospectus, or to
a section of the prospectus that does not indicate that it is
a principal strategy.
COMMENT 5: VANGUARD ENERGY FUND (PROSPECTUS PAGE 10)
COMMENT: In the disclosure concerning the Vanguard Energy Fund's policy against
frequent trading and market timing, there is the following statement,
"Certain Vanguard funds charge shareholders purchase and/or redemption
fees." Disclose the circumstances in which the fees will not be imposed, as
required by Form N-1A (no item specified). To the extent applicable, this
comment applies to each series of the Registrant.
RESPONSE: The following disclosure is already included in the discussion of
redemption fees in the "Investing With Vanguard" section of the prospectus,
pursuant to Item 6 of Form N-1A:
Redemption fees may not apply to certain categories of redemptions, such as
those that Vanguard reasonably believes may not raise frequent-trading or
market-timing concerns. These categories are: redemptions of shares
purchased through the reinvestment of dividend and capital gains
distributions; redemptions resulting from account transfers and share class
conversions within the same fund; redemptions from or within
employer-
Christian Sandoe, Esq.
May 20, 2005
Page 4
sponsored defined contribution plans serviced by Vanguard's
Integrated Retirement Plan Solutions Department and Vanguard's
Institutional Investment Group; redemptions resulting from required minimum
distributions from an individual retirement account for which Vanguard
serves as trustee or custodian; redemptions resulting from individual
retirement account conversions, recharacterizations, and excess
contributions; redemptions within Vanguard advisory programs (such as
Vanguard Fiduciary Services) and institutional rebalancing and asset
allocation programs; redemptions from or within annuity programs for which
Vanguard provides specialized marketing or support services; and
redemptions by certain pension plans as required by law or by regulatory
authorities. Redemption fees also may be waived if required by law,
regulation, or court order.
Certain intermediaries might not exempt redemption fees as described above.
Please also see Other Rules You Should Know--Investing With Vanguard
Through Other Firms regarding accounts held through intermediaries.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Investor Shares of most Vanguard
funds through a financial intermediary, such as a bank,
broker, or investment advisor. HOWEVER, ACCESS TO ADMIRAL
SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE
CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER
ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM.
When intermediaries establish omnibus accounts in the Vanguard funds for
their clients, we cannot monitor the individual clients' trading activity.
However, we review trading activity at the omnibus account level, and we
look for activity that may indicate potential frequent trading or
market-timing. If we detect suspicious trading activity, we will seek the
assistance of the intermediary to investigate that trading activity and
take appropriate action, including prohibiting additional purchases of fund
shares by a client. Intermediaries may apply frequent-trading policies that
differ from those described in this prospectus. If you invest with Vanguard
through an intermediary, please read that firm's program materials
carefully to learn of any rules or fees that may apply.
COMMENT 6: VANGUARD ENERGY FUND (PROSPECTUS PAGE 11)
COMMENT: The prospectus indicates that a discussion about the board's approval
of the fund's investment advisory agreement is included in the fund's
report to shareholders covering the period from February 1, 2005, to July
31, 2005. This prospectus will be effective before the report is available,
so indicate that the report is not yet available. To the extent applicable,
this comment applies to each series of the Registrant.
RESPONSE: We will add the following sentence to the new disclosure: "The report
will be available within 60 days after July 31, 2005."
COMMENT 7: VANGUARD ENERGY FUND (PROSPECTUS PAGE 12)
COMMENT: In the discussion of the Vanguard Energy Fund's investment advisor,
there are two portfolio managers listed. Indicate the separate roles of
each portfolio manager. To the extent applicable, this comment applies to
each series of the Registrant.
Christian Sandoe, Esq.
May 20, 2005
Page 5
RESPONSE: This comment only applies to the Energy Fund, and the Energy Fund's
current disclosure complies with the requirements of Item 5 of Form N-1A.
The prospectus currently describes Karl Bandtel as the fund's manager since
2002, and James Bevilacqua as a fund manager involved in the portfolio
management and securities analysis of the fund since 1998.
COMMENT 8: EACH SERIES OF THE REGISTRANT
COMMENT: To the extent applicable, the same comments apply to each series of the
Registrant.
RESPONSE: To the extent applicable, we have considered comments 1 through 7
above with respect to each series of the Registrant.
COMMENT 9: VANGUARD PRECIOUS METALS AND MINING FUND
COMMENT: Given the Fund's propensity to invest in emerging markets, disclose
emerging markets risk for the Fund in the Primary Risks section of the
prospectus.
RESPONSE: The following risk disclosure is included in the Primary Risks section
of the prospectus, "The Fund is subject to ... Emerging markets risk, which
is the chance that, to the extent the Fund invests in them, stocks of
emerging markets could be substantially more volatile, and substantially
less liquid, than the stocks of more developed foreign markets."
COMMENT 10: VANGUARD PRECIOUS METALS AND MINING FUND (SAI PAGE B-34)
COMMENT: The disclosure concerning the advisor's portfolio management
compensation program discusses a bonus payment based, in part, on
investment performance. Disclose the benchmark and time period used to
calculate the bonus.
RESPONSE: The disclosure in the Registrant's next filing under 485(b) will
comply with the requirements for Item 15 of Form N-1A.
* * * * *
As required by the SEC, each series of the Registrant acknowledge that:
- The funds are responsible for the adequacy and accuracy of the
disclosure in the filing.
- Staff comments or changes in response to staff comments in the filings
reviewed by the staff do not foreclose the Securities and Exchange
Commission from taking any action with respect to the filing.
- The funds may not assert staff comments as a defense in any proceeding
initiated by the Securities and Exchange Commission or any person
under the federal securities laws of the United States.
Please call me at (610) 503-2320 if you have any questions.
Sincerely,
Christopher A. Wightman
Associate Counsel
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1 For example, as of January 31, 2004, Vanguard Energy Fund's market cap range
was $0.5 to $272.5 billion, and Vanguard Precious Metals and Mining Fund's range
was $0.4 to $37.3 billion.