INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of August, 2000, between VANGUARD EXPLORER
FUND, a Delaware business trust (the "Fund"), and WELLINGTON MANAGEMENT COMPANY,
a Massachusetts limited liability partnership (the "Adviser").
WHEREAS, the Fund is an open-end, diversified management investment company
registered under the 1940 Act, as amended; and
WHEREAS, the Fund desires to retain Adviser to render investment advisory
services to certain assets of the Fund which the Board of Trustees of the Fund
determines to assign to Adviser (referred to in this Agreement as the "WMC
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 Fund hereby employs Adviser as investment
adviser, on the terms and conditions set forth herein, for the assets of the WMC
Portfolio. 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 Fund employs Adviser to manage the investment and
reinvestment of the assets of the WMC 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 Fund, and in compliance with the
objectives, policies and limitations set forth in the Fund's prospectus, any
additional operating policies or procedures that the Fund communicates to the
Adviser in writing, 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 purchases and sales of securities for the WMC
Portfolio, and is directed to use its best efforts to obtain the best available
price and most favorable execution for such
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transactions, except as otherwise permitted by the Board of Trustees of the Fund
pursuant to written policies and procedures provided to the Adviser. The Adviser
may also be authorized to effect individual securities transactions at
commission rates in excess of the minimum commission rates available, if the
Adviser determines in good faith that such amount of commission is 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 the
Adviser's overall responsibilities with respect to the Fund and the other Funds
in the same Fund Group. Adviser will promptly communicate to the Fund's officers
and Board of Trustees 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 WMC Portfolio for the quarter: .250% on the first $500 million of
net assets; .200% on the next $250 million of net assets; .150% on the next $250
million of net assets; .l00% on net assets in excess of $1 billion.
The Basic Fee, as provided above, will be increased or decreased by applying a
Performance Fee Adjustment (the "Adjustment") based on the investment
performance of the WMC Portfolio relative to the investment performance of the
Xxxxxxx 2000 Growth Index (the "Index"). The investment performance of the WMC
Portfolio will be based on the cumulative return over a trailing 36-month period
ending with the applicable quarter, relative to the cumulative total return of
the Index for the same time period. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
WMC PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
--------------------------- -----------------------
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 by -6% through 6% -0.00 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
* For purposes of determining the fee adjustment calculation, the basic fee is
calculated by applying the quarterly rate against the net assets of the Fund
averaged over the same time period for which the performance is measured.
4.1. OTHER SPECIAL RULINGS RELATING TO ADVISER'S COMPENSATION. The Index will
not be fully operable as the sole performance index used to determine the
Adviser's Adjustment until the quarter ending July 31, 2003. Until that date,
the Adviser's Adjustment will be determined
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by linking the investment performance of the Index and that of the Small Company
Growth Fund Stock Index (the "Prior Index") as follows.
(a) QUARTER ENDING OCTOBER 31, 2000. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the eleven quarters
ending July 31, 2000, with that of the Index for the quarter ending October
31, 2000.
(b) QUARTER ENDING JANUARY 31, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the ten quarters
ending July 31, 2000, with that of the Index for the two quarters ending January
31, 2001.
(c) QUARTER ENDING APRIL 30, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the nine quarters
ending July 31, 2000, with that of the Index for the three quarters ending April
30, 2001.
(d) QUARTER ENDING JULY 31, 2001. The Adviser's Adjustment will be determined by
linking the investment performance of the Prior Index for eight quarters ending
July 31, 2000, with that of the Index for the four quarters ending July 31,
2001.
(e) QUARTER ENDING OCTOBER 31, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the seven quarters
ending July 31, 2000, with that of the Index for the five quarters ending
October 31, 2001.
(f) QUARTER ENDING JANUARY 31, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the six quarters
ending July 31, 2000, with that of the Index for the six quarters ending January
31,2002.
(g) QUARTER ENDING APRIL 30, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the five quarters
ending July 31, 2000, with that of the Index for the seven quarters ending April
30, 2002.
(h) QUARTER ENDING JULY 31, 2002. The Adviser's Adjustment will be determined by
linking the investment performance of the Prior Index for four quarters ending
July 31, 2000, with that of the Index for the eight quarters ending July
31, 2002.
(i) QUARTER ENDING OCTOBER 31, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the
3
three quarters ending July 31, 2000, with that of the Index for the nine
quarters ending October 31, 2002.
j) QUARTER ENDING JANUARY 31, 2003. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the two quarters
ending July 31, 2000, with that of the Index for the ten quarters ending January
31, 2003.
(k) QUARTER ENDING APRIL 30, 2003. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the one quarter
ending July 31, 2000, with that of the Index for the eleven quarters ending
April 30, 2003.
(1) QUARTER ENDING JULY 31,2003. The Index is 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) PORTFOLIO PERFORMANCE. The investment performance of the WMC Portfolio for
any period, expressed as a percentage of the "WMC Portfolio unit value" per
share at the beginning of the period, will be the sum of: (i) the change in the
WMC Portfolio's net asset value per-share during the period; (ii) the unit value
of the Fund's cash distributions from WMC Portfolio's net investment income and
realized net capital gains (whether short or long term) having an ex-dividend
date occurring within the period; (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 by the WMC 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 paid
or payable on undistributed realized long-term capital gains shall be treated as
reinvested in the WMC 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) "WMC PORTFOLIO UNIT VALUE." The "WMC Portfolio unit value" will be
determined by dividing the total net assets of the WMC Portfolio by a given
number of units. Initially, the number of units in the WMC Portfolio will equal
the total shares outstanding of the Fund on August 1, 2000. Subsequently, as
assets are added to or withdrawn from the WMC Portfolio, the number of units of
the WMC Portfolio will be adjusted based on the unit value of the WMC Portfolio
on the day such changes are executed. Any cash buffer maintained by the Fund
outside of the WMC Portfolio shall neither be included in the total net assets
of the WMC Portfolio nor included in the computation of the WMC Portfolio Unit
Value.
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(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 the period; (ii) the
value, computed consistently with the Index, of cash distributions having an ex-
dividend date occurring within the 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. The calculation will be gross of applicable costs and expenses.
(d) EFFECT OF TERMINATION. In the event of termination of this Agreement, the
fees provided in this Agreement 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 Fund and Adviser 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.
6. COMPLIANCE. Adviser agrees to comply with all policies, procedures or
reporting requirements that the Board of Trustees of the Fund reasonably adopts
and communicates to Adviser in writing, including any such policies, procedures
or reporting requirements relating to soft dollar or directed brokerage
arrangements.
7. 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 Fund in any way or
otherwise be deemed an agent of the Fund.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect Adviser 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. DURATION AND TERMINATION. This Agreement will become effective on August 1,
2000, and will continue in effect thereafter 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 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.
5
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
Fund 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 Fund. 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 9, 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.
10. 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.
11. 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 1st day of August, 2000.
ATTEST: VANGUARD EXPLORER FUND:
By /S/ XXXXXXX XXXXXX By /S/ XXXX X. XXXXXXX
------------------ -------------------
Chairman, CEO and President
ATTEST: WELLINGTON MANAGEMENT COMPANY, LLP
By /S/ XXXXXXX X. KOONCES By /S/ XXXXXXXX X. XXXXXX
---------------------- ----------------------
Xxxxxxxx X. Xxxxxx
Senior Vice President
VANGUARD EXPLORER FUND
INVESTMENT ADVISORY AGREEMENT ADDENDUM
Effective January 31, 2003
This Addendum amends Section 4 of the Investment Advisory Agreement dated
August 1, 2000 between VANGUARD EXPLORER FUND (the "Fund") and WELLINGTON
MANAGEMENT COMPANY, LLP ("WMC") as follows.
4. Compensation of WMC. For the services to be rendered by WMC as provided in
this Agreement, the Fund will pay to WMC 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 WMC Portfolio for the quarter:
.250% on the first $500 million of net assets;
.200% on the next $250 million of net assets;
.150% on the next $250 million of net assets;
.l00% on net assets in excess of $1 billion.
Subject to the Transition Rule described in Section 4.1, the Basic Fee, as
provided above, will be increased or decreased by applying a Performance Fee
Adjustment (the "Adjustment") based on the investment performance of the WMC
Portfolio relative to the investment performance of the Xxxxxxx 2500 Growth
Index. The investment performance of the WMC Portfolio will be based on the
cumulative return over a trailing 36-month period ending with the applicable
quarter, relative to the cumulative total return of the Xxxxxxx 2500 Growth
Index for the same time period. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
WMC PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
--------------------------- -----------------------
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 by -6% through 6% -0.00 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
* For purposes of determining the Adjustment, the quarterly rate is applied
against the net assets of the WMC Portfolio averaged over the same time period
for which the performance is measured.
4.1. Transition Rule for Calculating WMC's Compensation. The fee structure
described in Section 4 will not be fully operable until the quarter ending
January 31, 2006. Until that date, the Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2500 Growth Index with that of the
Xxxxxxx 2000 Growth Index and that of the Small Company Growth Fund Stock Index.
1. Quarter Ending April 30,2003. The Adjustment will be determined by linking
the investment performance of the Small Company Growth Fund Stock Index for the
one quarter ending July 31, 2000, with that of the Xxxxxxx 2000 Growth Index
for the ten quarters ending January 31, 2003 with that of the Xxxxxxx 2500
Growth Index for the one quarter ending April 30, 2003.
2. Quarter Ending July 31, 2003. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the ten quarters
ending January 31, 2003 with that of the Xxxxxxx 2500 Growth Index for the two
quarters ending July 2003.
3. Quarter Ending October 31, 2003. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the nine
quarters ending January 3 1, 2003, with that of the Xxxxxxx 2500 Growth Index
for the three quarters ending October 31, 2003.
4. Quarter Ending January 31, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the eight
quarters ending January 3 1, 2003, with that of the Xxxxxxx 2500 Growth Index
for the four quarters ending January 31, 2004.
5. Quarter Ending April 30, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the seven
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for
the five quarters ending April 30,2004.
6. Quarter Ending July 31, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the six quarters
ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for the six
quarters ending July 31, 2004.
7. Quarter Ending October 31, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the five
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for
the seven quarters ending October 31, 2004.
8. Quarter Ending January 31, 2005. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the four
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for
the eight quarters ending January 31, 2005.
9. Quarter Ending April 30, 2005. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the three
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for
the nine quarters ending April 30, 2005.
10. Quarter Ending July 31, 2005. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the two quarters
ending January 31, 2003, with that of the Xxxxxxx 2500 Growth Index for the ten
quarters ending July 31, 2005.
11. Quarter Ending October 31, 2005. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the one
quarter ending January 3 1, 2003, with that of the Xxxxxxx 2500 Growth Index for
the eleven quarters ending October 31, 2005.
12. Quarter Ending January 31,2006. The benchmark transition is complete.
No Effect on Other Provisions. Except with respect to these fee schedules, all
other provisions of the Investment Advisory Agreement dated August 1,2000 remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed this 27th day of November, 2002.
VANGUARD EXPLORER FUND
/S/ XXXX X. XXXXXXX
----------------------------------
Chairman, CEO and President
WELLINGTON MANAGEMENT COMPANY
By /S/ XXXXXX X. XXXXXXXXX
---------------------------------
Title Chairman and CEO
