The portfolio invests mainly in a diversified group of high-yielding, higher-risk corporate bonds—commonly known as “junk bonds”—with medium- and lower-range credit quality ratings. The portfolio invests at least 80% of its assets in corporate bonds that are rated below Baa by Moody’s Investors Service, Inc. (Moody’s); have an equivalent rating by any other independent bond-rating agency; or, if unrated, are determined to be of comparable quality by the portfolio’s advisor. The portfolio’s 80% policy may be changed only upon 60 days’ notice to shareholders.
The portfolio may not invest more than 20% of its assets in any of the following, taken as a whole: bonds with credit ratings lower than B or the equivalent, convertible securities, preferred stocks, and fixed and floating rate loans of medium- to lower range credit quality. The loans in which the portfolio may invest will be rated Baa or below by Moody’s; have an equivalent rating by any other independent bond-rating agency; or, if unrated, are determined to be of comparable quality by the portfolio’s advisor. The portfolio’s high-yield bonds and loans have mostly short- and intermediate-term maturities.
- The portfolio may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country’s currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent a portfolio’s securities from falling in value during foreign market downswings.
- The portfolio may invest in derivatives. In general, derivatives may involve risks different from, and possibly greater than, those of a portfolio’s other investments. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the portfolio to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes.
- The portfolio may invest in fixed income futures contracts, fixed income options, interest rate swaps, total return swaps, credit default swaps, or other derivatives only if the expected risks and rewards of the derivatives are consistent with the investment objective, policies, strategies, and risks of each Portfolio as disclosed in this prospectus. The advisors will not use derivatives to change the risk exposure of the portfolio. In particular, derivatives will be used only where they may help the advisor: invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment; add value when these instruments are attractively priced; or adjust sensitivity to changes in interest rates.
- The portfolio’s daily cash balance may be invested in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, the portfolio bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests.
- The portfolio may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the portfolio’s best interest, so long as the alternative is consistent with the fund’s investment objective. For instance, the fund may invest beyond the normal limits in derivatives or ETFs that are consistent with the fund’s objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.
- The portfolio, may take temporary defensive positions that are inconsistent with its normal investment policies and strategies—for instance, by allocating substantial assets to cash, commercial paper, or other less volatile instruments—in response to adverse or unusual market, economic, political, or other conditions. In doing so, the portfolio may succeed in avoiding losses but may otherwise fail to achieve its investment objective.