EX-99.B5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of January, 1998, between VANGUARD VARI-
ABLE INSURANCE FUND, INC., a Pennsylvania business trust (the "Fund"), and
XXXXXXXX INVESTMENT MANAGEMENT, INC., a Massachusetts Corporation
("Xxxxxxxx").
WHEREAS, the Fund is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain Xxxxxxxx to render investment advisory
services to certain assets of the Fund which the Board of Trustees of the Fund
determines to assign to Xxxxxxxx (referred to in this Agreement as the
"Xxxxxxxx Portfolio"), and Xxxxxxxx is willing to render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H
that in consideration of the premises and mutual promises hereinafter set
forth, the parties hereto agree as follows:
1. APPOINTMENT OF XXXXXXXX. The Fund hereby employs Xxxxxxxx as investment
adviser, on the terms and conditions set forth herein, for the assets of the
Fund which the Board of Trustees determines to assign to Xxxxxxxx. The Board
of Trustees may, from time to time, make additions to, and withdrawals from,
the assets of the Fund assigned to Xxxxxxxx. Xxxxxxxx accepts such employment
and agrees to render the services herein set forth, for the compensation
herein provided.
2. DUTIES OF XXXXXXXX. The Fund employs Xxxxxxxx to manage the investment
and reinvestment of the assets of the Xxxxxxxx Portfolio, to continuously re-
view, supervise and administer an investment program for such assets of the
Fund, to determine in its discretion the securities to be purchased or sold
and the portion of such assets to be held uninvested, to provide the Fund
with records concerning the activities of Xxxxxxxx which the Fund is required
to maintain, and to render regular reports to the Fund's officers and Board
of Trustees concerning the discharge of the foregoing responsibilities.
Xxxxxxxx shall discharge the foregoing responsibilities subject to the con-
trol of the officers and the Board of Trustees of the Fund, and in compliance
with the objectives, policies and limitations set forth in the Fund's pro-
spectus and applicable laws and regulations. Xxxxxxxx agrees to provide, at
its own expense, the office space, furnishings and equipment and the person-
nel required by it to perform the services on the terms and for the compensa-
tion provided herein.
3. SECURITIES TRANSACTIONS. Xxxxxxxx is authorized to select the brokers or
dealers that will execute the purchases and sales of securities for the
Xxxxxxxx Portfolio, and is directed to use its best efforts to obtain the
best available price and most favorable execution, except as prescribed here-
in. Subject to policies established by the Board of Trustees of the Fund,
Xxxxxxxx may also be authorized to effect individual securities transactions
at commission rates in excess of the minimum commission rates available, if
Xxxxxxxx determines in good faith that such amount of commission was reason-
able in relation to the value of the brokerage or research services provided
by such broker or dealer, viewed in terms of either that particular transac-
tion or overall responsibilities of Xxxxxxxx with respect to the Fund. The
execution of such transactions shall not be deemed to represent an unlawful
act or breach of any duty created by this Agreement or otherwise. Xxxxxxxx
will promptly communicate to the officers and Trustees of the Fund such in-
formation relating to portfolio transactions as they may reasonably request.
4. COMPENSATION OF XXXXXXXX. For the services to be rendered by the Adviser
as provided in this Agreement, the Fund shall pay to the Adviser at the end
of each of the Fund's fiscal quarters, a fee calculated by applying a quar-
terly rate, based on an annual percentage rate of 0.15%, to the average
month-end net assets of the Portfolio for the quarter.
Subject to the transition rule described in Section 4.1 of this Agreement,
the Basic Fee, as provided above, shall be increased or decreased by applying
an incentive/penalty fee adjustment based on the investment performance of
the Xxxxxxxx Portfolio relative to the investment performance of the Small
Company Growth Fund Stock Index (the "Index") for the thirty-six month period
ending with the applicable quarter. The Index, which is prepared by Morning-
star, Inc. ("Morningstar"), measures the composite investment performance of
the stocks held by the nation's largest small capitalization stock mutual
funds. While Morningstar is not affiliated with the Fund or any of the Fund's
affiliates, it maintains the Index pursuant to instructions from the Fund.
The Fund may direct Morningstar to change the composition of the Index on a
forward-looking basis, as appropriate.
The following table sets forth the adjustment factors to Xxxxxxxx'x Basic
Fee payable under this Agreement:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT *
---------------------------- -----------------
Trails by -12% or more................................ -0.50 X Basic Fee
Trails by more than -6% up to -12%.................... -0.25 X Basic Fee
Trails/exceeds from -6% through 6%.................... 0 X Basic Fee
Exceeds by more than 6% but less than 12%............. +0.25 X Basic Fee
Exceeds by 12% or more................................ +0.50 X Basic Fee
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* For purposes of this calculation, the basic fee is calculated by ap-
plying the quarterly rate against average assets over the same time
period which the performance is measured.
4.1. TRANSITION RULE FOR CALCULATING XXXXXXXX'X COMPENSATION. The Index
shall not be fully operable as the performance benchmark used to determine
Xxxxxxxx'x performance fee adjustment until the quarter ending December 31,
2000. Until that date, Xxxxxxxx'x performance fee adjustment shall be de-
termined by linking the investment performance of the Index and that of the
Xxxxxxx 2000 Small Stock Index (the "Xxxxxxx 2000") as follows:
1. Quarter Ending March 31, 1998. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the eleven quarters ending December 31, 1997 with that of the In-
dex for the quarter ending March 31, 1998.
2. Quarter Ending June 30, 1998. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the ten quarters ending December 31, 1997 with that of the Index
for the two quarters ending June 30, 1998.
3. Quarter Ending September 30, 1998. Xxxxxxxx'x performance fee adjust-
ment shall be determined by linking the investment performance of the Rus-
sell 2000 for the nine quarters ending December 31, 1997 with that of the
Index for the three quarters ending September 30, 1998.
4. Quarter Ending December 31, 1998. Xxxxxxxx'x performance fee adjust-
ment shall be determined by linking the investment performance of the Rus-
sell 2000 for the eight quarters ending December 31, 1997 with that of the
Index for the four quarters ending December 31, 1998.
5. Quarter Ending March 31, 1999. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the seven quarters ending December 31, 1997 with that of the In-
dex for the five quarters ending March 31, 1999.
6. Quarter Ending June 30, 1999. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the six quarters ending December 31, 1997 with that of the Index
for the six quarters ending June 30, 1999.
7. Quarter Ending September 30, 1999. Xxxxxxxx'x performance fee adjust-
ment shall be determined by linking the investment performance of the Rus-
sell 2000 for the five quarters ending December 31, 1997 with that of the
Index for the seven quarters ending September 30, 1999.
8. Quarter Ending December 31, 1999. Xxxxxxxx'x performance fee adjust-
ment shall be determined by linking the investment performance of the Rus-
sell 2000 for the four quarters ending December 31, 1997 with that of the
Index for the eight quarters ending December 31, 1999.
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9. Quarter Ending March 31, 2000. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the three quarters ending December 31, 1997 with that of the In-
dex for the nine quarters ending March 31, 2000.
10. Quarter Ending June 30, 2000. Xxxxxxxx'x performance fee adjustment
shall be determined by linking the investment performance of the Xxxxxxx
2000 for the two quarters ending December 31, 1997 with that of the Index
for the ten quarters ending June 30, 2000.
11. Quarter Ending September 30, 2000. Xxxxxxxx'x performance fee adjust-
ment shall be determined by linking the investment performance of the Rus-
sell 2000 for the quarter ending December 31, 1997 with that of the Index
for the eleven quarters ending September 30, 2000.
12. Quarter Ending December 31, 2000. The Index shall be fully operable.
4.2. OTHER SPECIAL RULES RELATING TO XXXXXXXX'X COMPENSATION
(a) Xxxxxxxx Portfolio Performance. The investment performance of the
Xxxxxxxx Portfolio for any period, expressed as a percentage of the
"Xxxxxxxx Portfolio unit value" at the beginning of such period, shall be
the sum of: (i) the change in the Xxxxxxxx Portfolio unit value during
such period; (ii) the unit value of the Fund's cash distributions from the
Xxxxxxxx Portfolio's net investment income and realized net capital gains
(whether long-term or short-term) having an ex-dividend date occurring
within such period; and (iii) the unit value of capital gains taxes paid
or accrued during such period by the Fund for undistributed realized long-
term capital gains realized from the Xxxxxxxx Portfolio.
The "Xxxxxxxx Portfolio unit value" shall be determined by dividing the
total net assets of the Xxxxxxxx Portfolio by a given number of units.
Pursuant to the Fund's investment advisory agreement with Xxxxxxxx dated
May 1, 1996, the number of units in the Xxxxxxxx Portfolio originally was
equal to the total shares outstanding of the Fund on that date. Subse-
quently, as assets have been added to or withdrawn from the Xxxxxxxx Port-
folio, the number of units of the Xxxxxxxx Portfolio has been, and shall
continue to be, adjusted based on the unit value of the Xxxxxxxx Portfolio
on the day such changes are executed.
(b) Index and Xxxxxxx 2000 Performance. The investment record of the In-
dex or Xxxxxxx 2000 for any period, expressed as a percentage of the Index
or Xxxxxxx 2000, as applicable, at the beginning of such period, shall be
the sum of: (i) the change in the level of the Index or Xxxxxxx during
such period, and (ii) the value, computed consistently with the Index or
Xxxxxxx 2000, of cash distributions having an ex-dividend date occurring
within such period made by companies whose securities comprise the Index
or Xxxxxxx 2000. For this purpose, cash distributions on the securities
which comprise the Index or Xxxxxxx 2000 shall be treated as reinvested in
the Index or Xxxxxxx 2000, as applicable, at least as frequently as the
end of each calendar quarter following the payment of the dividend.
(c) Effect of Termination. In the event of termination of this Agreement,
the fees provided in Sections 4 and 4.1 shall be computed on the basis of
the period ending on the last business day on which this Agreement is in
effect, subject to a pro rata adjustment based on the number of days
elapsed in the current fiscal quarter as a percentage of the total number
of days in such quarter.
5. REPORTS. The Fund and Xxxxxxxx agree to furnish to each other with cur-
rent prospectuses, proxy statements, reports to shareholders, certified cop-
ies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF XXXXXXXX. The services of Xxxxxxxx to the Fund are not to be
deemed exclusive, and Xxxxxxxx shall be free to render similar services to
others so long as its services to the Fund are not impaired thereby. Xxxxxxxx
shall be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent
the Fund in any way or otherwise be deemed an agent of the Fund.
7. LIABILITY OF XXXXXXXX. No provision of this Agreement shall be deemed to
protect Xxxxxxxx against any liability to the Fund or its shareholders to
which it might otherwise be subject by reason of any willful misfeasance, bad
faith or gross negligence in the performance of its duties or the reckless
disregard of its obligations under this Agreement.
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8. DURATION AND TERMINATION. This Agreement shall become effective on Janu-
ary 1, 1998, and shall continue in effect until December 31, 1998, and there-
after, only so long as such continuance is approved at least annually by
votes of the Fund's Board of Trustees who are not parties to such Agreement
or interested persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval. In addition, the question of con-
tinuance of the Agreement may be presented to the shareholders of the Fund;
in such event, such continuance shall be effected only if approved by the af-
firmative vote of a majority of the outstanding voting securities of the
Fund.
Provided, however, that (ii) this Agreement may at any time be terminated
without payment of any penalty either by vote of the Board of Trustees of the
Fund or by vote of a majority of the outstanding voting securities of the
Fund, on sixty days' written notice to Xxxxxxxx, (ii) this Agreement shall
automatically terminate in the event of its assignment, and (iii) this Agree-
ment may be terminated by Xxxxxxxx on ninety days' written notice to the
Fund. Any notice under this Agreement shall be given in writing, addressed
and delivered, or mailed postpaid, to the other party at any office of such
party.
As used in this Section 8, the terms "assignment," "interested persons," a
"vote of a majority of the outstanding voting securities" shall have the re-
spective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the Investment Company Act of 1940.
9. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
10. PROXY POLICY. With regard to the solicitation of shareholder votes, the
Fund shall vote the shares of all securities held by the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be exe-
cuted this 29th day of October, 1997.
ATTEST: VANGUARD VARIABLE INSURANCE FUND,
INC.
By __________________________________
Secretary By __________________________________
President
ATTEST: XXXXXXXX INVESTMENT MANAGEMENT, INC.
By __________________________________ By __________________________________
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