[VANGUARD SHIP LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600
610-669-5284
Lisa_Matson@vanguard.com
April 3, 2006
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
Dear Mr. Sandoe,
The following responds to your comments of March 17, 2006 on the
post-effective amendment of the registration statement of the Vanguard
Specialized Funds (the "Trust"). You commented on Post-Effective Amendment No.
58 that was filed on February 8, 2006.
COMMENT 1: DIVIDEND APPRECIATION FUND - MARKET CAPITALIZATION RANGE
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Comment: Please disclose market capitalization ranges as of a relevant
recent date. If the Fund's strategy is to invest in small or
mid-cap stocks, please include appropriate risk disclosure.
Response: We have added the following text:
The Fund's investment in the index will be within the
capitalization range of the companies included in the Dividend
Achievers Select Index ($198 million to $378 billion as of
February 28, 2006). In the future, the index's market
capitalization range may be higher or lower, and the Fund's
investments may track another index. Such changes may occur at
any time and without notice to Fund shareholders.
COMMENT 2: DIVIDEND APPRECIATION FUND- PROFILE
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Comment: Please insert appropriate date of Fund launch on Page 2
(change from 2005 to 2006).
Response: We have added correct language.
COMMENT 3: DIVIDEND APPRECIATION FUND - FREQUENT TRADING AND MARKET
TIMING
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Comment: The Fund's broad policies with respect to frequent trading and
market-timing are disclosed under the heading "Frequent
Trading or Market-Timing." However, specific policies
applicable to discrete types of investors are disclosed in
various places throughout the "Investing with Vanguard"
section. All of the Fund's policies concerning frequent
trading and market-timing should be disclosed together under
the heading "Frequent Trading and Market-Timing."
Response: We believe that the Fund's policies against frequent trading
and market-timing are properly disclosed in the prospectus
pursuant to Item 6(e)(4) of Form N-1A. Item 6(e)(4) does not
require that the specific policies
Christian Sandoe
April 3, 2006
Page 2
applicable to each type of shareholder be disclosed together
in the prospectus. As such, we believe that it is appropriate
to have the general discussion of the Fund's policies against
frequent trading and market-timing under the heading "Frequent
Trading or Market-Timing" with a reference to the "Investing
with Vanguard" section where specific policies applicable to
different types of shareholders and transactions are
disclosed.
We believe that removing the disclosure from the "Investing
with Vanguard" section and combining the disclosure into a
single "Frequent Trading and Market-Timing" section would make
the discussion of transaction policies incomplete in the
"Investing with Vanguard" section. Repeating the specific
policies in both the "Investing with Vanguard" section and
under the "Frequent Trading and Market-Timing" heading would
unnecessarily clutter the prospectus with duplicative
disclosure.
COMMENT 4: DIVIDEND APPRECIATION FUND--BACK COVER
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Comment: Please add Vanguard's website to the list of places to contact
Vanguard to obtain more information about Vanguard, the Fund,
and the Fund's annual and semi-annual reports.
Response: We have added appropriate disclosure.
COMMENT 5: VANGUARD PRECIOUS METALS AND MINING FUND: PROFILE
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Comment: Consider adding disclose in the Fund's strategy section that
the companies involved in processing focus primarily on
precious metals, whereas companies engaged in mining
activities tend to deal in minerals, rather than precious
metals.
Response: We believe our current disclosure adequately explains the
various types of companies in which the Fund may invest,
including such companies' varied mining or processing
activities, as well as the variety of materials in which the
Fund is permitted to invest.
COMMENT 6: VANGUARD PRECIOUS METALS AND MINING FUND--PRIMARY RISKS
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Comment: Since most of the companies in which the Fund invests are
small-and mid-capitalization companies, please include
investment in small and mid-cap stocks as a primary risk of
the Fund.
Response: We have added appropriate risk disclosure.
COMMENT 7: VANGUARD PRECIOUS METALS AND MINING FUND--PRIMARY
INVESTMENT STRATEGY
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Comment: Since emerging markets risk is listed as a primary risk,
consider including it as part of the Fund's primary investment
strategy.
Response: The Fund's primary investment strategy is to invest in stocks
of foreign and U.S. companies principally engaged in
activities related to metals or minerals. The primary strategy
is not to invest in countries located in emerging markets. The
fact that many of the Fund's investments are in companies
located in emerging markets is a byproduct of the Fund's
actual strategy. For this reason we have included such
disclosure as a risk, even though it is not a primary
investment strategy. The existence of emerging markets risk
does not change the Fund's primary strategy of investing in
companies engaged in activities related to metals and minerals
into one of seeking to invest in companies located in emerging
markets.
COMMENT 8: VANGUARD PRECIOUS METALS AND MINING FUND - FREQUENT TRADING
AND MARKET TIMING
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Comment: The Fund's broad policies with respect to frequent trading and
market-timing are disclosed under the heading "Frequent
Trading or Market-Timing." However, specific policies
applicable to discrete types of investors are disclosed in
various places throughout the "Investing with Vanguard"
section. All of the Fund's policies concerning frequent
trading and market-timing should be disclosed together under
the heading "Frequent Trading and Market-Timing."
Christian Sandoe
April 3, 2006
Page 3
Response: We believe that the Fund's policies against frequent trading
and market-timing are properly disclosed in the prospectus
pursuant to Item 6(e)(4) of Form N-1A. Item 6(e)(4) does not
require that the specific policies applicable to each type of
shareholder be disclosed together in the prospectus. As such,
we believe that it is appropriate to have the general
discussion of the Fund's policies against frequent trading and
market-timing under the heading "Frequent Trading or
Market-Timing" with a reference to the "Investing with
Vanguard" section where specific policies applicable to
different types of shareholders and transactions are
disclosed.
We believe that removing the disclosure from the "Investing
with Vanguard" section and combining the disclosure into a
single "Frequent Trading and Market-Timing" section would make
the discussion of transaction policies incomplete in the
"Investing with Vanguard" section. Repeating the specific
policies in both the "Investing with Vanguard" section and
under the "Frequent Trading and Market-Timing" heading would
unnecessarily clutter the prospectus with duplicative
disclosure.
COMMENT 9: VANGUARD PRECIOUS METALS AND MINING FUND --BACK COVER
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Comment: Please add Vanguard's website to the list of places to contact
vanguard to obtain more information about Vanguard, the Fund,
and the Fund's annual and semi-annual reports.
Response: We have added appropriate disclosure.
COMMENT 10: STATEMENT OF ADDITIONAL INFORMATION: ADVISORY FEE DISCLOSURE
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Comment: The detail regarding the Vanguard Precious Metals and Mining
Fund's advisory fee structure (base and performance fee
structure) should be included in the SAI.
Response: We currently have the appropriate level of disclosure.
Vanguard operates a multi-manager structure for certain funds
pursuant to an exemptive order granted by the Commission in
2003 (the "2003 Order").(1) The funds are permitted under the
2003 Order to enter into and amend investment advisory
agreements with unaffiliated third-party advisors without
shareholder approval, provided certain conditions are met. The
2003 Order exempts multi-managed Vanguard funds from certain
disclosure requirements so that they are only required to
disclose advisory fees (as both a dollar amount and as a
percentage of a fund's net assets) as follows: (1) aggregate
fees paid by a fund to Vanguard and any affiliated advisors;
(2) aggregate fees paid by the fund to unaffiliated
third-party advisors; and (3) aggregate fees paid by the fund
to all investment advisors (collectively, the "Aggregate Fee
Disclosure"). A fund using Aggregate Fee Disclosure does not
have to include additional details, including asset-based and
performance fee schedules, about its advisory fees and fee
arrangements.
An Aggregate Fee Disclosure regime is in the best interests of
fund shareholders. In a recent proposal to codify
multi-manager exemptive orders, the Commission said that fund
sponsors (including Vanguard) have represented that they "are
able to negotiate lower fees with subadvisers if they do not
have to disclose those fees separately, and in our orders we
have provided them relief from our disclosure requirements. We
are proposing to codify this relief, which permits a manager
of managers fund to disclose only the aggregate amount of
advisory fees that it pays to subadvisers as a group."(2)
COMMENT 11: STATEMENT OF ADDITIONAL INFORMATION: PERFORMANCE FEES
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Comment: SAI disclosure for M&G Investment Management Limited states
that a performance fee is paid to the adviser. Please ensure
that the Prospectus disclosure is comparable.
(1) In the Matter of Vanguard Convertible Securities Fund, et al., File No.
812-12380, Inv. Co. Act Release Nos. 26062 (May 29, 2003) (Notice) and 26089
(June 25, 2003) (order). (2) Exemption from Shareholder Approval for Certain
Subadvisory Contracts, Securities Act Release No. 8312 (Oct. 23, 2003).
Christian Sandoe
April 3, 2006
Page 4
Response: We have added the following disclosure:
In addition, M&G's advisory fee may be increased or decreased,
based on the cumulative returns of the Fund over a trailing
36-month period as compared with that of the S&P/Citigroup
Customized Precious Metals and Mining Index over the same
period.
COMMENT 12: STATEMENT OF ADDITIONAL INFORMATION: MATERIALS CONFLICTS
OF INTEREST
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Comment: Please clarify what the material conflicts of interest are
that the adviser to Vanguard Precious Metals and Mining Fund
seeks to eliminate.
Response: The following is added to the disclosure under Material
Conflicts of Interest:
At M&G, individual portfolio managers may manage multiple
accounts for multiple clients. In addition to mutual funds,
these other accounts may include non-US collective investment
schemes, insurance companies, and segregated pension funds.
M&G manages potential conflicts between funds or with other
types of accounts through allocation policies and procedures,
internal review processes and oversight by directors. M&G has
developed trade allocation procedures and controls to ensure
that no one client, regardless of type, is intentionally
favored at the expense of another. Allocation policies are
designed to address potential conflicts in situations where
two or more funds participate in investment decisions
involving the same securities.
COMMENT 13: STATEMENT OF ADDITIONAL INFORMATION: COMPENSATION
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Comment: Please describe how bonus calculation is made to the Fund's
portfolio managers.
Response: The disclosure under Description of Compensation states:
Bonus payment levels are closely aligned with `outputs',
chiefly investment performance but also other results. Bonuses
are discretionary, variable year on year and reflect personal,
team and company performance. Depending on the fund's
objective, M&G uses either a representative index or a
representative group of competitor funds as a benchmark
against which to measure performance. In the case of Vanguard
Precious Metals and Mining Fund, the performance factor of the
fund manager's bonus is dependent on the Fund's performance
over one- and three-year periods compared with a
representative benchmark index. The actual bonus, which is
paid on an annual basis, may be up to a multiple of base
salary depending on the achieved percentile ranking in this
peer group over these time periods.
COMMENT 14: TANDY REQUIREMENTS
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Comment: The SEC is now requiring all registrants to provide at the end
of response letters to registration statement comments, the
following statements:
o The Trust is responsible for the adequacy and accuracy
of the disclosure in the filing.
o Staff comments or changes in response to staff comments
in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to
the filing.
o The Trust may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
Response: As required by the SEC, we will provide the foregoing
acknowledgements.
* * * * *
Christian Sandoe
April 3, 2006
Page 5
As required by the SEC, the Trust acknowledges that:
o The Trust is responsible for the adequacy and accuracy
of the disclosure in the filing.
o Staff comments or changes in response to staff comments
in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to
the filing.
o The Trust may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
Please contact me at (610) 669-5284 with any questions or comments
regarding the above responses. Thank you.
Sincerely,
/s/ Lisa Matson
Lisa L. B. Matson
Associate Counsel
Securities Regulation, Legal Department