INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of January, 2000, between VANGUARD
EQUITY INCOME FUND, a Delaware business trust (the "Company"), and Wellington
Management Company, LLP, a Massachusetts limited liability partnership
("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 Equity
Income 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 "Wellington 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 that 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 Wellington 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, 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 Wellington
Portfolio, and is directed to use its best efforts to obtain the best available
price and most favorable execution for such transactions, except as otherwise
permitted by the Board of Trustees of the Company pursuant to written policies
and procedures provided to the Adviser. 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 Wellington Portfolio for the quarter:
.125% on the first $1 billion of net assets
.100% on the next $4 billion of net assets;
.080% 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 be
calculated as a percentage of the Basic Fee and will change proportionately with
the investment performance of the Fund. The investment performance will be based
on the cumulative return over a trailing 36-month period ending with the
applicable quarter, relative to the cumulative total return, as detailed in
Section 4.2(c), of the Lipper Equity Income average (the "Benchmark") for the
same time period. The Adjustment applies as follows:
Cumulative 36-Month Performance of PERFORMANCE FEE ADJUSTMENT AS A
Wellington Portfolio VS. BENCHMARK PERCENTAGE OF BASIC FEE*
---------------------------------- --------------------------------
Exceeds by 3% to 6% 10%
Exceeds by more than 6% 20%
Trails by 3% to 6% -10%
Trails by more than 6% -20%
___________________________
*For purposes of this calculation, the Basic Fee is calculated by applying
the quarterly rate against the average assets over the same time period which
the performance is measured.
4.1. Transition Rule for Calculating Adviser's COMPENSATION. The
Performance Fee Adjustment will not be fully operable until the quarter ending
December 31, 2002. Until that time, the following transition rules will apply:
(a) January 1, 2000 through September 30, 2000. The Adviser's compensation
will be the Basic Fee. No Performance Fee Adjustment will apply during this
period.
(b) October 1, 2000 through December 31, 2002. Beginning October 1, 2000,
the Performance Fee Adjustment will take effect on a progressive basis with
regards to the number of months elapsed between January 1, 2000, and the quarter
for which the Adviser's fee is being computed. During this period, the
Performance Fee Adjustment outlined in Section 4.0 will be multiplied by a
fraction. The fraction will equal the number of months elapsed since January 1,
2000, divided by thirty-six.
(c) On and After December 31, 2002. For the quarter ending December 31,
2002, and thereafter, the Performance Fee Adjustment will be fully operable. The
period used to calculate the Adjustment shall be the 36 months preceding the end
of the quarter for which the fee is being computed.
4.2. Other Special Rules Relating to Adviser'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
(a) Wellington Portfolio Performance. The investment performance of the
Wellington Portfolio for any period, expressed as a percentage of the
"Wellington Portfolio unit value" at the beginning of such period, will be
calculated in a manner consistent with the total return methodology used by
Lipper Inc., to calculate the investment performance of the Benchmark.
(B) "WELLINGTON PORTFOLIO UNIT VALUE." The "Wellington Portfolio unit
value" will be determined by dividing the total net assets of the Wellington
Portfolio by a given number of units. Initially, the number of units in the
Wellington Portfolio will equal the total shares outstanding of the Fund on
January 1, 2000. Subsequently, as assets are added to or withdrawn from the
Wellington Portfolio, the number of units of the Wellington Portfolio will be
adjusted based on the unit value of the Wellington Portfolio on the day such
changes are executed. Any cash buffer maintained by the Fund outside of the
Wellington Portfolio shall neither be included in the total net assets of the
Wellington Portfolio nor included in the computation of the Wellington Portfolio
Unit Value.
(c) Benchmark Performance. The investment record of the Benchmark for any
period will be obtained from an independent source at the end of each applicable
quarter. The calculation will be based on the thirty-six month period ending
with the applicable quarter and will be gross of applicable costs and expenses.
(d) Effect of Termination. In the event of termination of this Agreement,
the fees provided in Sections 4.0 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 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 Company 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 Company or
the Fund in any way or otherwise be deemed an agent of the Company or the Fund.
8. 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.
9. Duration and Termination. This Agreement will become effective on
January 1, 2000, and will continue in effect until December 31, 2002, 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 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 ___ day of _______, 1999.
ATTEST: VANGUARD EQUITY INCOME FUND
By ________________________ By _________________________________
Chairman, CEO and President
ATTEST: WELLINGTON MANAGEMENT COMPANY, LLP.
By _________________________ By __________________________________
CEO and President
