INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 30th day of March, 2010, between Vanguard Scottsdale Funds, a Delaware statutory trust (the “Trust”), and Frontier Capital Management Co., LLC (the “Advisor”), a Delaware limited liability company.
W I T N E S S E T H
WHEREAS, the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”); and
WHEREAS, the Trust offers a series of shares known as Vanguard Explorer Value Fund (the “Fund”); and
WHEREAS, the Trust desires to retain the Advisor to render investment advisory services to the Fund, and the Advisor is willing to render such services.
NOW THEREFORE, in consideration of the mutual promises and undertakings set forth in this “Agreement,” the Trust and the Advisor hereby agree as follows:
1. Appointment of Advisor. The Trust hereby employs the Advisor as investment advisor, on the terms and conditions set forth herein, for the portion of the assets of the Fund that the Trust’s Board of Trustees (the “Board of Trustees”) determines in its sole discretion to assign to the Advisor from time to time (referred to in this Agreement as the “Frontier Portfolio”), as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. (“Vanguard”). The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Advisor. The Advisor accepts such employment and agrees to render the services herein set forth, for the compensation herein provided.
2. Duties of Advisor. The Trust employs the Advisor to manage the investment and reinvestment of the assets of the Frontier Portfolio; to continuously review, supervise, and administer an investment program for the Frontier Portfolio; 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 all records concerning the activities of the Advisor that the Fund is required to maintain; and to render regular reports to the Trust’s officers and the Board of Trustees concerning the discharge of the foregoing responsibilities. The Advisor will discharge the foregoing responsibilities subject to the supervision and oversight of the Trust’s officers and the Board of Trustees, and in compliance with the objective, policies, and limitations set forth in the Fund’s prospectus and Statement of Additional Information, any additional operating policies or procedures that the Fund communicates to the Advisor in writing, and applicable laws and regulations. The Advisor agrees to provide, at its own expense, the office space, furnishings and equipment, and personnel required by it to perform the services on the terms and for the compensation provided herein.
3. Securities Transactions. The Advisor is authorized to select the brokers or dealers that will execute purchases and sales of securities for the Frontier Portfolio, and is directed to seek to obtain best execution for such transactions, consistent with Section 28(e) of the Securities Exchange Act of 1934. In selecting brokers or dealers to execute trades for the Frontier Portfolio, the Advisor will comply with all applicable statutes, rules, interpretations by the U.S. Securities and Exchange Commission or its staff, other applicable law, and the written policies and procedures established by the Board of Trustees and communicated to the Advisor in writing.
The Advisor may aggregate orders for the purchase or sale of securities on behalf of the Fund with orders on behalf of other portfolios the Advisor manages, to the extent consistent with the Advisor’s duty to seek best execution and to ensure the fair and equitable allocation of aggregated transactions.
4. Compensation of Advisor. For services to be provided by the Advisor pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor agrees to accept as full compensation therefor, an investment advisory fee consisting of a base fee plus a performance adjustment at the rates specified in Schedule A to this agreement, payable quarterly in arrears.
5. Reports. The Fund and the Advisor agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request, including, but not limited to, information about changes in investment officers of the Advisor who are responsible for managing the Frontier Portfolio. By execution of this Agreement, the Trust acknowledges receipt of Part II of the Advisor’s Form ADV.
6. Compliance. The Advisor agrees to comply with all Applicable Law and all policies, procedures or reporting requirements that the Board of Trustees reasonably adopts and communicates to the Advisor in writing, including, without limitation, any such policies, procedures, or reporting requirements relating to soft dollar or other brokerage arrangements. “Applicable Law” means (i) the “federal securities laws” as defined in Rule 38a-1(e)(1) under the 1940 Act, as amended from time to time, and (ii) any and all other laws, rules, and regulations, whether foreign or domestic, in each case applicable at any time and from time to time to the investment management operations of the Advisor in relation to the Frontier Portfolio.
7. Status of Advisor. The services of the Advisor to the Fund are not to be deemed exclusive, and the Advisor will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Advisor will be deemed to be an independent contractor and will, 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 or the Trust.
8. Liability of Advisor. No provision of this Agreement will be deemed to protect the Advisor 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.
9. Limitations on Consultations. The Advisor is prohibited from consulting with other advisors of the Fund, except Vanguard, concerning transactions for the Fund in securities or other assets.
10. Duration; Termination; Notices; Amendment. This Agreement will become effective on the date hereof and will continue in effect for a period of two years thereafter, and shall continue in effect for successive twelve-month periods thereafter, only so long as each such continuance specifically is approved at least annually by the Board of Trustees, including a majority of those 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 continuance of the Agreement may be presented to the shareholders of the Fund; in such event, such continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund.
Notwithstanding the foregoing, however, (i) this Agreement may at any time be terminated without payment of any penalty either by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, on thirty days’ written notice to the Advisor, (ii) this Agreement will automatically terminate in the event of its assignment, and (iii) this Agreement may be terminated by the Advisor on ninety days’ written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party as follows:
If to the Fund, at:
Vanguard Explorer Value Fund
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Xxxxx X. XxXxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Advisor, at:
Frontier Capital Management Co., LLC
00 Xxxxxx Xxxxxx
Xxxxxx, XX 00000
Attention: Xxxxx X. Xxxxxxxxx
Telephone: 000-000-0000
This Agreement may be amended by mutual consent, but the consent of the Trust must be approved (i) by a majority of those members of the Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such amendment, and (ii) to the extent required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund.
As used in this Section 10, the terms “assignment,” “interested persons,” and “vote of a majority of the outstanding voting securities” will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act.
11. Severability. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement will not be affected thereby.
12. Confidentiality. Each party hereto shall keep confidential any and all information obtained in connection with the services rendered hereunder and relating directly or indirectly to the other party (and in the case of the Fund, Vanguard) and shall not disclose any such information to any person except that each party may disclose such information (i) with the prior written consent of the other party, (ii) as required by law, regulation, court order, or the rules or regulations of any self-regulatory organization, governmental body, or official having jurisdiction over the Advisor or the Fund, as applicable, (iii) that is publicly available other than due to disclosure by it or its affiliates, or (iv) becomes known to it from a source other than the other party.
13. Proxy Policy. The Advisor acknowledges that Vanguard, at the direction of the Fund, will vote the shares of all securities that are held by the Fund.
14. Governing Law. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state.
IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory Agreement to be executed as of the date first set forth herein.
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Frontier Capital Management, LLC |
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_______________________________ _________ Signature Date
____________________________ Print Name
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_______________________________ _________ Signature Date
____________________________ Print Name
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SCHEDULE A
Pursuant to Section 4 of the Agreement, the Fund shall pay the Advisor compensation as follows:
1.1. Calculation of the Base Fee. The Base Fee for each fiscal quarter of the Fund is calculated by multiplying an Annual Percentage Rate (shown below) to the average daily net assets of the Frontier Portfolio during such fiscal quarter, and dividing the result by four. The Fund’s fiscal quarter ends are the months ending November, February, May, and August.
|
Annual Percentage Rate Schedule | |
|
Average Daily Net Assets |
Annual Percentage Rate |
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On the first $100 million |
0.35% |
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On the next $100 million |
0.30% |
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On assets over $200 million |
0.27% |
1.2. Calculation of the Performance Adjustment. The Performance Adjustment for each fiscal quarter of the Fund shall be calculated by multiplying the appropriate Adjustment Percentage (shown below) to the Annual Percentage Rate applied to the average of the month-end net assets of the Frontier Portfolio over the previous 36 months, and dividing the result by four. The Adjustment Percentage for each fiscal quarter of the Frontier Portfolio shall be determined by applying the following Performance Adjustment Schedule to the cumulative performance of the Frontier Portfolio relative to the Xxxxxxx 2000 Value Index (the “Index”) over the rolling 36-month period applicable to such fiscal quarter. (See Fee Example #1.)
|
Performance Adjustment Schedule | |
|
Cumulative Net Performance of Frontier Portfolio vs. Index Over Applicable 36-Month Period |
Adjustment Percentage |
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More than +6% |
+25% |
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From -6% up to and including +6% |
No adjustment |
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Less than -6% |
–25% |
1.3. Transition Rules for Calculating Advisor’s Compensation. The Performance Adjustment will not be fully incorporated into the determination of the Adjusted Fee until the fiscal quarter ended May 31, 2013. Until that date, the following transition rules will apply:
(a) March 30, 2010, through February 28, 2011. The Adjusted Fee will be deemed to equal the Base Fee. No Performance Adjustment will apply to the calculation of the Adjusted Fee during this period.
(b) March 1, 2011, through May 31, 2013. Beginning March 1, 2011, the Performance Adjustment will take effect on a progressive basis with regard to the number of months elapsed between May 31, 2010, and the end of the quarter for which the Adjusted Fee is being computed. During this period, the Performance Adjustment that has been determined as provided above will be calculated using the cumulative performance of the Frontier Portfolio and the Index for the period commencing June 1, 2010, and ending as of the end of the most recent quarter of the fund. For these purposes, the endpoints and the size of the range over which a positive or negative adjustment percentage applies and the corresponding maximum adjusted percentage will be multiplied by a time-elapsed fraction. The fraction will equal the number of months elapsed since May 31, 2010, divided by 36. (See Fee Example #2.)
(c) On and After May 31, 2013. The Adjusted Fee will be equal to the Base Fee plus the Performance Adjustment.
1.4. Other Special Rules Relating to Advisor’s Compensation. The following special rules will also apply to the Advisor’s compensation:
(a) Frontier Portfolio Unit Value. The “Frontier Portfolio unit value” shall be determined by dividing the total net assets of the Frontier Portfolio by a given number of units. The number of units in the Frontier Portfolio shall be equal to the total shares outstanding of the Frontier Portfolio on the effective date of this Agreement; provided, however, that as assets are added to or withdrawn from the Frontier Portfolio, the number of units in the Frontier Portfolio shall be adjusted based on the unit value of the Frontier Portfolio on the day such changes are executed.
(b) Frontier Portfolio Performance. The investment performance of the Frontier Portfolio for any period, expressed as a percentage of the Frontier Portfolio unit value at the beginning of the period, will be the sum of: (i) the change in the Frontier Portfolio unit value during such period; (ii) the unit value of the Fund’s cash distributions from the Frontier Portfolio’s net investment income and realized net capital gains (whether short or long term) having an ex-dividend date occurring within the period; and (iii) the unit value of capital gains taxes per share paid or payable on undistributed realized long-term capital gains accumulated to the end of such period by the Frontier Portfolio, expressed as a percentage of the Frontier Portfolio unit value at the beginning of such period. For this purpose, the value of distributions of realized capital gains per unit of the Frontier Portfolio, of dividends per unit of the Frontier Portfolio paid from investment income, and of capital gains taxes per unit of the Frontier Portfolio paid or payable on undistributed realized long-term capital gains shall be treated as reinvested in units of the Frontier Portfolio at the unit value in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends, and taxes. For purposes of calculating investment performance, the Frontier Portfolio unit value will be determined net of all fees and expenses of the Fund attributable to the Frontier Portfolio. Thus, the performance of the Frontier Portfolio will be net of all fees and expenses of the Fund attributable to the Frontier Portfolio when compared to the Index.
(c) Index Performance. The investment record of the Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. For this purpose, cash distributions on the securities that make up the Index will be treated as reinvested in the Index, at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses. All calculations will be consistent with the methodology used by the Index provider.
(d) Performance Computations. The foregoing notwithstanding, any computation of the investment performance of the Frontier Portfolio and the investment record of the Index shall be in accordance with any then applicable rules of the U.S. Securities and Exchange Commission.
(e) Effect of Termination. In the event of termination of this Agreement, the fees provided in this Agreement beginning on the first day of the then-current fiscal quarter and ending on the last business day on which this Agreement is in effect (the “Short Quarter”) shall be calculated by applying the foregoing annual percentage rates to the average daily net assets of the Frontier Portfolio during the Short Quarter, dividing the result by four, and multiplying that figure by a ratio equal to the number of days in the Short Quarter divided by the total number of days in the full quarter.
1. Fee Example #1 - Adjusted Fee Calculation: The following example serves as a guide for the calculation of the Adjusted Fee when the cumulative excess return of the portfolio versus the Index falls within the stepped adjustment range: “Exceeds by more than +6%.”
Assume the Adjusted Fee for the fiscal quarter ending May 31, 2013, is being calculated, and the month-end net assets of the Frontier Portfolio over the rolling 36-month period applicable to such fiscal quarter are as follows:
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Month-End Net Assets of Frontier Portfolio ($ million) | ||||||||||||
|
|
Jan |
Feb |
Mar |
April |
May |
June |
July |
Aug |
Sep |
Oct |
Nov |
Dec |
|
2010 |
|
|
|
|
|
101 |
102 |
103 |
104 |
105 |
106 |
107 |
|
2011 |
108 |
109 |
110 |
111 |
112 |
113 |
114 |
115 |
116 |
117 |
118 |
119 |
|
2012 |
120 |
121 |
122 |
123 |
124 |
125 |
126 |
127 |
128 |
129 |
130 |
131 |
|
2013 |
132 |
133 |
134 |
135 |
136 |
|
|
|
|
|
|
|
Also, assume the cumulative performance of the Frontier Portfolio over the rolling 36-month period applicable to such fiscal quarter is +30%, and the cumulative performance of the Index over such period is +20.0%. Thus, the excess return of the Frontier Portfolio over the applicable period is +10%. The Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending May 31, 2013, would be $138,718.75 and is calculated as follows:
a. Base Fee of $113,375.00 which is calculated as follows. The average daily net assets of the Frontier Portfolio over the fiscal quarter ending May 31, 2013 (assumed to be $134,500,000), with an Annual Percentage Rate of 0.35% applied to the first $100 million and an Annual Percentage Rate of 0.30% applied to the remaining $34.5 million. Therefore, the Base Fee is equal to:
Base Fee = [(a1 X b1) + (a2 X b2)] / 4, where;
a = Average daily net assets over the fiscal quarter ending May 31, 2013
For the purposes of this example, a = $134,500,000
a1 = $100,000,000
a2 = a – a1 = $34,500,000
b1 = Annual Percentage Rate applied to first $100 million, (= 0.35%)
b2 = Annual Percentage Rate applied to next $100 million, (= 0.30%)
Base Fee = [($100,000,000 X 0.35%) + ($34,500,000 X 0.30%)] / 4 = $113,375.00
b. Performance Adjustment of $25,343.75, which is calculated as follows. The average month-end net assets of the Frontier Portfolio over the rolling 36-month period applicable to the fiscal quarter ending May 31, 2013, are $118,500,000. The excess return of the Frontier Portfolio (+30.0%) over the Index (+20.0%) over such period is +10%. An excess return of +10%, when applied to the Performance Adjustment Schedule, corresponds to an excess return of more than +6%, which corresponds to an Adjustment Percentage of +25%. The performance adjustment is calculated as follows:
The Performance Adjustment = [((f X g1) X h1) + ((f X g2) X h2)] / 4
f = Performance Adjustment Percentage, (= 25%)
g1 = Annual Percentage Rate applied to first $100 million, (= 0.35%)
g2 = Annual Percentage Rate applied to next $100 million, (= 0.30%)
h = Average month-end net assets for the 36-months ended
May 31, 2013, (= $118,500,000)
h1 = $100,000,000
h2 = h – h1 = $18,500,000
Performance Adjustment = [((25% X 0.35%) X $100,000,000) +
((25% X 0.30%) X $18,500,000)] / 4 = $25,343.75
c. An Adjusted Fee of $138,718.75, which is calculated as follows:
Adjusted Fee = i + j, where;
i = Base Fee, (= $113,375.00)
j = Performance Adjustment, (= $25,343.75)
Adjusted Fee = $113,375.00 + $25,343.75
= $138,718.75
d. Certain Conventions. In practice, calculations will be extended to the eighth decimal point. Performance differences between the Frontier Portfolio and the Index are treated in a symmetric manner, such as in the example.
2. Fee Example #2 - Adjusted Fee Calculation Under Transition Rules: The following example serves as a guide for the calculation of the Adjusted Fee during the transition period when the cumulative excess return of the portfolio versus the Index falls within the stepped adjustment range: “Exceeds by more than +6%” (after the end points of the range are pro-rated).
Assume that the Advisor’s compensation is being calculated for the fiscal quarter ended August 31, 2012, and the month-end net assets of the Frontier Portfolio over the 27-month period applicable to such fiscal quarter are as follows:
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Month-End Net Assets of Frontier Portfolio ($ million) | ||||||||||||
|
|
Jan |
Feb |
Mar |
April |
May |
June |
July |
Aug |
Sep |
Oct |
Nov |
Dec |
|
2010 |
|
|
|
|
|
101 |
102 |
103 |
104 |
105 |
106 |
107 |
|
2011 |
108 |
109 |
110 |
111 |
112 |
113 |
114 |
115 |
116 |
117 |
118 |
119 |
|
2012 |
120 |
121 |
122 |
123 |
124 |
125 |
126 |
127 |
|
|
|
|
Also, assume the cumulative performance of the Frontier Portfolio over the 27-month period applicable to the August 31, 2012, fiscal quarter is +20.0%, and the cumulative performance of the Index over such period is +15.0%. Thus, the excess return of the Frontier Portfolio over the applicable period is +5.0%. The Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending August 31, 2012, would be $125,000.00 and is calculated as follows:
a. Base Fee of $106,625.00, which is calculated as follows. The average daily net assets of the Frontier Portfolio over the fiscal quarter ending August 31, 2012 (assumed to be $125,500,000), with an Annual Percentage Rate of 0.35% applied to the first $100 million and an Annual Percentage Rate of 0.30% applied to the remaining $25.5 million. Therefore, the Base Fee is equal to:
Base Fee = [(a1 X b1) + (a2 X b2)] / 4, where;
a = Average daily net assets over the fiscal quarter ending August 31, 2012
For the purposes of this example, a = $125,500,000
a1 = $100,000,000
a2 = a – a1 = $25,500,000
b1 = Annual Percentage Rate applied to first $100 million, (= 0.35%)
b2 = Annual Percentage Rate applied to next $100 million, (= 0.30%)
Base Fee = [($100,000,000 X 0.35%) + ($25,500,000 X 0.30%)] / 4 = $106,625.00
b. Performance Adjustment of +$18,375.00, which is calculated as follows. The average month-end net assets of the Frontier Portfolio over the performance period (June 1, 2010, to August 31, 2012) are $114,000,000. The excess return of the Frontier Portfolio (+20.0%) over the Index (+15.0%) over such period is +5.0%. An excess return of +5.0%, when applied to the Performance Adjustment Schedule, corresponds to a relative performance of exceeds by +6% (after the endpoints of the range are pro-rated), which corresponds to an Adjustment Percentage of +18.75%, calculated as follows:
d = Minimum Transition Period excess return for appropriate performance range, determined as follows:
[(e / f) X g1]
e = Number of months elapsed from May 31, 2010, to August 31, 2012 (= 27)
f = Number of months in full rolling performance period (= 36)
g1 = Minimum excess return for appropriate performance range (= +6.0%)
d = [(27/36) X +6.0%] = +4.5%
Transition Period Adjustment Percentage = [(e / f) X h] = k, where;
e = Number of months elapsed from May 31, 2010, to August 31, 2012 (= 27)
f = Number of months in full rolling performance period (= 36)
h = Adjustment Percentage for the appropriate performance range (= +25%)
Adjustment Percentage for transition period = [(27/36) X +25%) = +18.75% = i
Therefore, the Performance Adjustment = [((i X j1) X k1) + ((i X j2) X k2)] / 4
i = Performance Adjustment Percentage, (= 18.75%)
j1 = Annual Percentage Rate applied to first $100 million, (= 0.35%)
j2 = Annual Percentage Rate applied to next $100 million, (= 0.30%)
k = Average month-end net assets for the 27-months ended
August 31, 2012, (= $114,000,000)
k1 = $100,000,000
k2 = k – k1 = $14,000,000
Performance Adjustment = [((18.75% X 0.35%) X $100,000,000) +
((18.75% X 0.30%) X $14,000,000)] / 4 = $18,375.00
c. An Adjusted Fee of $125,000.00, which is calculated as follows:
o + p = Adjusted Fee, where;
o = Base Fee, (= $106,625.00)
p = Performance Adjustment, (= $18,375.00)
Adjusted Fee = $106,625.00 + $18,375.00 = $125,000.00
d. Certain Conventions. In practice, calculations will be extended to the eighth decimal point. Performance differences between the Frontier Portfolio and the Index are treated in a symmetric manner, such as in the example.
