Execution Copy
A form of
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 1st day of March, 2007, between Vanguard
Convertible Securities Fund, a Delaware statutory trust (the "Trust"), and
Oaktree Capital Management, LLC, a California limited liability company (the
"Advisor").
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
Convertible Securities Fund (the "Fund"); and
WHEREAS, the Trust retained the Advisor to render investment advisory
services to the Fund under an Investment Advisory Agreement, dated as of August
17, 2004 (the "Prior Agreement"); and
WHEREAS, the Trust desires to amend and restate such Investment
Advisory Agreement in certain respects, and the Advisor is willing to render
investment advisory services to the Fund in accordance with such amendments.
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 "Oaktree 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 Oaktree Portfolio; to continuously review,
supervise, and administer an investment program for the Oaktree 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 but shall not
bear any other expenses in connection with performing the services hereunder.
3. Securities Transactions. The Advisor is authorized to select the brokers or
dealers that will execute purchases and sales of securities for the Oaktree
Portfolio, and is directed to use its best efforts to obtain best execution for
such transactions. In selecting brokers or dealers to execute trades for the
Oaktree 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 established by the Board of
Trustees and communicated to the Advisor in writing.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be purchased or sold. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Advisor in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such other customers.
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 agrees to furnish to the Advisor all current prospectuses,
proxy statements, reports to shareholders, sales literature, and other materials
prepared for distribution to the shareholders of the Fund or the public that
refer in any way to the Advisor prior to the use of such materials and the Fund
agrees that it will not use such materials if the Advisor reasonably objects in
writing after receipt of such materials. Notwithstanding the foregoing, the Fund
shall not be required to furnish sales literature or marketing materials to the
Advisor for review if such material is substantially similar to materials
previously reviewed and approved by the Advisor. In addition, the Fund shall
furnish such other information with regard to its affairs as the Advisor may
reasonably request.
The Advisor agrees to furnish to the Fund the most recent audited
statement of financial condition of the Advisor and such other information with
regard to its affairs as the Fund may reasonably request including, but not
limited to, information regarding any change in the investment officers of the
Advisor, including those who are responsible for managing the Oaktree Portfolio.
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
they relate to the services provided by the Advisor to the Fund pursuant to this
Agreement, 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
Oaktree 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. Actions or
decisions regarding the Oaktree Portfolio may be the same as or different from
actions or decisions which the Advisor, or any of its affiliates, or any of
their respective officers, directors, or employees may take with respect to its
other client accounts so long as the Advisor acts in good faith. 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 shall continue in effect for successive
twelve-month periods, 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 Convertible Securities Fund
X.X. Xxx 0000 Xxxxxx Xxxxx, XX 00000 Attention: Xxxxxx X.
Xxxxxxx Telephone: 000-000-0000 Facsimile: 000-000-0000
If to the Advisor, at: Oaktree Capital Management, LLC 000 Xxxxx
Xxxxx Xxxxxx, 00xx Xxxxx Xxx Xxxxxxx, XX 00000 Attention: Xxxxx
Xxxxx Telephone: 000-000-0000 Facsimile: 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
notwithstanding the previous sentence, each party may disclose such information
(i) to its respective attorneys, accountants, directors, officers, advisory
personnel, and members of any board of trustees, (ii) with the prior written
consent of the other party, (iii) 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, (iv) that is publicly available other than due to disclosure by it
or its affiliates, or (v) 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.
15. Indemnification. Vanguard, on behalf of the Trust, agrees to indemnify the
Advisor and the Advisor's officers, directors, and employees, as well as persons
who control (as defined in Section 2(a)(9) of the 0000 Xxx) or are controlled by
the Advisor (collectively, the "Indemnified Parties") to the fullest extent
permitted under law (taking into account any exemptive relief granted to
Vanguard or the Fund) against any liabilities and expenses (including reasonable
attorneys' fees) that the Indemnified Parties may incur as a result of any (i)
untrue statement of a material fact in any of the Fund's registration statements
relating to shares of the Fund or any other sales materials relating to the
Fund, and all amendments thereto, or (ii) the omission of a material fact
required to have been included in such registration statement or sales material,
or necessary to make the statements therein not misleading, unless the statement
or omission was made in reliance upon the oral or written information that the
Indemnified Parties provided to Vanguard or the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Investment
Advisory Agreement to be executed as of the date first set forth herein.
Oaktree Capital Vanguard Convertible
Management, LLC Securities Fund
------------------------ ---------- -------------------------- ----------
Signature Date Signature Date
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Print Name Print Name
A-2
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 Oaktree Portfolio during such fiscal quarter, and
dividing the result by four. The Fund's fiscal quarter ends
are the months ending February, May, August, and November.
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Annual Percentage Rate Schedule
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Average Daily Annual Percentage Rate
Net Assets
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1.2 Calculation of the Performance Adjustment. The Base Fee, as
provided above, will be increased or decreased by applying a
Performance Fee Adjustment (the "Adjustment") based on the
cumulative investment performance of the Oaktree Portfolio
over a trailing 36-month period relative to that of the
Xxxxxxx Xxxxx All US Convertible Index (the "Benchmark") over
the same period. The Adjustment applies as follows:
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Performance Adjustment Schedule
-------------------------------------------------------------------------------------------------------------
Cumulative 36-Month Performance of Oaktree Portfolio Adjustment Percentage*
vs.
Benchmark Over Applicable 36-Month Period
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* For purposes of the Adjustment calculation, the Base Fee is calculated by
applying the above rate schedule against the average month-end net assets of the
Oaktree Portfolio over the same period for which the performance is measured.
1.3 Transition Rules for Calculating Advisor's Compensation. The
performance adjustment schedule specified above will not be
fully incorporated into the determination of the Adjustment
until the fiscal quarter ended November 30, 2007. Until that
date, the Adjustment will be determined by linking the
investment performance of the Xxxxxxx Xxxxx All US Convertible
Index and that of the Credit Suisse First Boston Convertible
Index as specified in Schedule B.
1.4 Other Special Rules Relating to Advisor's Compensation. The
following special rules will also apply to the Advisor's
compensation:
(a) Oaktree Portfolio Unit Value. The "Oaktree Portfolio unit
value" shall be determined by dividing the total net assets of
the Oaktree Portfolio by a given number of units. At the
inception of this Agreement, the number of units in the
Oaktree Portfolio shall be equal to the number of such units
in existence as determined under the Prior Agreement;
provided, however, that as assets are added to or withdrawn
from the Oaktree Portfolio thereafter, the number of units of
the Oaktree Portfolio shall be adjusted based on the unit
value of the Oaktree Portfolio on the day such changes are
executed.
(b) Oaktree Portfolio Performance. The investment performance of
the Oaktree Portfolio for any period, expressed as a
percentage of the "Oaktree Portfolio unit value" at the
beginning of the period, will be the sum of: (i) the change in
the Oaktree Portfolio unit value during such period; (ii) the
unit value of the Fund's cash distributions from the Oaktree
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; expressed as a percentage of its net asset value
per share at the beginning of such period. For this purpose,
the 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 shares of the investment company at
the net asset value per share 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.
(c) Benchmark Performance. The investment record of the Benchmark
for any period, expressed as a percentage of the Benchmark
level at the beginning of such period, will be the sum of (i)
the change in the level of the Benchmark during such period,
and (ii) the value, computed consistently with the Benchmark,
of cash distributions having an ex-dividend date occurring
within such period made by companies whose securities make up
the Benchmark. For this purpose, cash distributions on the
securities that make up the Benchmark will be treated as
reinvested in the Benchmark, 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, and consistent with the methodology used by
Xxxxxxx Xxxxx.
(d) Performance Computations. The foregoing notwithstanding, any
computation of the investment performance of the Oaktree
Portfolio and the investment record of the Benchmark 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 Oaktree 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.
B-1
SCHEDULE B
Pursuant to Section 4 of the Agreement, the Adjustment for the first 2 fiscal
quarters in which this Agreement is in effect (March 1, 2007, through November
30, 2007) shall be calculated using the transition rules from the Prior
Agreement as specified below:
1. Quarter Ending May 31, 2007. The Adjustment will be
determined by linking the investment performance of the
Credit Suisse First Boston Convertible Index for the two
quarters ending November 30, 2004, with that of the Xxxxxxx
Xxxxx All US Convertible Index for the ten quarters ending
May 31, 2007.
2. Quarter Ending August 31, 2007. The Adjustment will be
determined by linking the investment performance of the
Credit Suisse First Boston Convertible Index for the one
quarter ending November 30, 2004, with that of the Xxxxxxx
Xxxxx All US Convertible Index for the eleven quarters
ending August 31, 2007.
