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INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this __ day of _____, 1999, between VANGUARD
WINDSOR FUNDS, a Delaware business trust (the "Company"), and Xxxxxxx X.
Xxxxxxxxx & Co., Inc., a New York corporation ("Adviser").
WHEREAS, the Company is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, the Company offers a series of shares known as Vanguard
Windsor Fund (the "Fund"); and
WHEREAS, the Company desires to retain Adviser to render investment
advisory services to certain assets of the Fund which the Board of Trustees of
the Company determines to assign to Adviser (referred to in this Agreement as
the "Xxxxxxxxx Portfolio"), and Adviser 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 ADVISER. The Company hereby employs Adviser 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 Adviser. The
Board of Trustees may, from time to time, make additions to, and withdrawals
from, the assets of the Fund assigned to Adviser. Adviser accepts such
employment and agrees to render the services herein set forth, for the
compensation herein provided.
2. DUTIES OF ADVISER. The Company employs Adviser to manage the
investment and reinvestment of the assets of the Xxxxxxxxx Portfolio, to
continuously review, 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 all records concerning the activities of Adviser that 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. Adviser will discharge the foregoing responsibilities subject
to the control of the officers and the Board of Trustees of the Company, and in
compliance with the objectives, policies and limitations set forth in the Fund's
prospectus and applicable laws and regulations. Adviser agrees to provide, at
its own expense, the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein.
3. SECURITIES TRANSACTIONS. Adviser is authorized to select the brokers
or dealers that will execute the purchases and sales of securities for the
Xxxxxxxxx Portfolio, and is directed
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to use its best efforts to obtain the best available price and most favorable
execution, except as prescribed herein. Subject to policies established by the
Board of Trustees of the Company, Adviser may also be authorized to effect
individual securities transactions at commission rates in excess of the minimum
commission rates available, if Adviser determines in good faith that such amount
of commission was reasonable in relation to the value of the brokerage or
research services provided by such broker or dealer, viewed in terms of either
that particular transaction or overall responsibilities of Adviser with respect
to its portion of the Fund. The execution of such transactions will not be
deemed to represent an unlawful act or breach of any duty created by this
Agreement or otherwise. Adviser will promptly communicate to the officers and
Trustees of the Company such information relating to portfolio transactions as
they may reasonably request.
4. COMPENSATION OF ADVISER. For the services to be rendered by Adviser
as provided in this Agreement, the Fund will pay to Adviser at the end of each
of the Fund's fiscal quarters, a Basic Fee calculated by applying a quarterly
rate, based on the following annual percentage rates, to the average month-end
net assets of the Xxxxxxxxx Portfolio for the quarter:
.15% on the first $1 billion of net assets;
.14% on the next $2 billion of net assets;
.12% on the next $2 billion of net assets;
.10% on net assets in excess of $5 billion.
Subject to the transition rule described in Section 4.1 of this
Agreement, the Basic Fee, as provided above, will be increased or decreased by
the amount of a Performance Fee Adjustment ("Adjustment"). The Adjustment will
calculated as a percentage of the Basic Fee and will change proportionately with
the investment performance of the Fund relative to the investment performance of
the Xxxxxxx 1000 Value Index (the "Index") for the thirty-six month period
ending with the applicable quarter. The Adjustment apply as follows:
CUMULATIVE 36-MONTH
PERFORMANCE OF XXXXXXXXX PORTFOLIO PERFORMANCE FEE ADJUSTMENT
VERSUS THE INDEX AS A PERCENTAGE OF BASIC FEE*
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Trails by more than 9% -50%
Trails by 0 to 9% Linear decrease from 0 to -50%
Exceeds by 0 to 9% Linear increase from 0 to +50%
Exceeds by more than 9% +50%
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* The Adjustment represents a percentage increase or decrease to the Basic
Fee payable to the Adviser for the quarter.
4.1. TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The
Performance Fee Adjustment will not be fully operable until June 1, 2002. Until
that time, the following transition rules will apply:
(a) JUNE 1, 1999 THROUGH MAY 31, 2000. The Adviser's
compensation will be the Basic Fee. No Performance Fee Adjustment will
apply during this period.
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(b) JUNE 1, 2000 THROUGH MAY 31, 2002. Beginning June 1, 2000,
the Performance Fee Adjustment will take effect on a progressive basis
with regards to the number of months elapsed between June, 1999 and the
quarter for which the Adviser's fee is being computed. During this
period, the Performance Fee Adjustment that has been determined under
Section will be multiplied by a fraction. The fraction will equal the
number of months elapsed since June 1, 1999 divided by thirty-six.
(c) ON AND AFTER JUNE 1, 2002. Beginning June 1, 2002, the
Performance Fee Adjustment will be fully operable.
4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION.
The following special rules will also apply to the Adviser's compensation:
(a) XXXXXXXXX PORTFOLIO PERFORMANCE. The investment
performance of the Xxxxxxxxx Portfolio for any period, expressed as a
percentage of the "Xxxxxxxxx Portfolio unit value" at the beginning of
such period, will be the sum of: (i) the change in the Xxxxxxxxx
Portfolio unit value during such period; (ii) the unit value of the
Fund's cash distributions from the Xxxxxxxxx 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 Xxxxxxxxx Portfolio. For this purpose, the unit value of
distributions per share of realized capital gains, of dividends per
share paid from investment income and of capital gains taxes per share
reinvested in the Xxxxxxxxx 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.
(b) "XXXXXXXXX PORTFOLIO UNIT VALUE." The "Xxxxxxxxx Portfolio
unit value" will be determined by dividing the total net assets of the
Xxxxxxxxx Portfolio by a given number of units. The number of units in
the Xxxxxxxxx Portfolio initially will equal to the total shares
outstanding of the Fund on June 1, 1999. Subsequently, as assets are
added to or withdrawn from the Xxxxxxxxx Portfolio, the number of units
of the Xxxxxxxxx Portfolio will be adjusted based on the unit value of
the Xxxxxxxxx Portfolio on the day such changes are executed.
(c) INDEX PERFORMANCE. The investment record of the Index for
any period, expressed as a percentage of the Index 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
comprise the Index. For this purpose, cash distributions on the
securities which comprise 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.
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(d) EFFECT OF TERMINATION. In the event of termination of this
Agreement, the fees provided in Sections 4 and 4.1 will 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 Company and Adviser agree to furnish to each other with
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.
6. STATUS OF ADVISER. The services of Adviser to the Fund are not to be
deemed exclusive, and Adviser will be free to render similar services to others
so long as its services to the Fund are not impaired thereby. Adviser 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 Company or
the Fund in any way or otherwise be deemed an agent of the Company or the Fund.
7. LIABILITY OF ADVISER. No provision of this Agreement will be deemed
to protect Adviser against any liability to the Company, the Fund or their
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.
8. DURATION AND TERMINATION. This Agreement will become effective on
June 1, 1999, and will continue in effect until May 31, 2001, and thereafter,
only so long as such continuance is approved at least annually by votes of the
Company'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 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.
Provided, however, that (i) this Agreement may at any time be
terminated without payment of any penalty either by vote of the Board of
Trustees of the Company or by vote of a majority of the outstanding voting
securities of the Fund, on sixty days' written notice to Adviser, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by Adviser on ninety days' written notice to
the Company. Any notice under this Agreement will 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" will have
the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and
Section 2(a)(42) of the Investment Company Act of 1940.
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9. 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.
10. PROXY POLICY. With regard to the solicitation of shareholder votes,
the Fund will vote the shares of all securities held by the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed this ___ day of _______, 1999.
ATTEST: VANGUARD WINDSOR FUNDS
By ________________________ By _________________________________
Secretary Chairman, CEO and President
ATTEST: XXXXXXX X. XXXXXXXXX & CO., INC.
By _________________________ By __________________________________
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