INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of this 1st day of August, 1996, between VANGUARD WINDSOR
FUNDS, INC., a Maryland corporation (the "Company"), and EQUINOX CAPITAL
MANAGEMENT, INC., a Delaware Corporation ("Equinox").
WHEREAS, the Equinox Portfolio is an open-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain Equinox to render to that series of
the Company known as " Windsor II" investment advisory services relating to
certain assets of Windsor II which the Board of Directors of the Company
determines to assign to Equinox (referred to as the "Equinox Portfolio"), and
Equinox 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 EQUINOX. The Fund hereby employs Equinox as investment
adviser, on the terms and conditions set forth herein, for the assets of Windsor
II which the Board of Directors determines to assign to Equinox. The Board of
Directors may, from time to time, make additions to, and withdrawals from, the
assets of the Equinox Portfolio assigned to Equinox. Equinox accepts such
employment and agrees to render the services herein set forth, for the
compensation herein provided.
2. DUTIES OF EQUINOX. The Fund employs Equinox to manage the investment and
reinvestment of the assets of the Equinox Portfolio, to continuously review,
supervise and administer an investment program for such assets of the Equinox
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 Company
with records concerning the activities of Equinox which the Company is required
to maintain, and to render regular reports to the Company's officers and Board
of Directors concerning the discharge of the foregoing responsibilities. Equinox
shall discharge the foregoing responsibilities subject to the control of the
officers and the Board of Directors of the Company, and in compliance with the
objectives, policies and limitations set forth in Windsor II's prospectus and
applicable laws and regulations. Equinox 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. Equinox is authorized to select the brokers or
dealers that will execute the purchases and sales of securities for that portion
of the assets of Windsor II for which it serves as investment adviser, and is
directed to use its best efforts to obtain the best available price and most
favorable execution, except as prescribed herein. Subject to policies
1
established by the Board of Directors of the Company, Equinox may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if Equinox 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
Equinox with respect to Windsor II. The execution of such transactions shall not
be deemed to represent an unlawful act or breach of any duty created by this
Agreement or otherwise. Equinox will promptly communicate to the officers and
Directors of the Company such information relating to portfolio transactions as
they may reasonably request.
4. COMPENSATION OF EQUINOX. For the services to be rendered by Equinox as
provided in this Agreement, the Windsor II shall pay to Equinox at the end of
each of the Company'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 Equinox Portfolio for the quarter:
.200% on the first $400 million of net assets;
.150% on the next $600 million of net assets;
.l25% on the next $1 billion of net assets;
.100% on the net assets in excess of $2 billion.
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of the Equinox Portfolio relative to the investment performance the Xxxxxxx 1000
Value Index.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to Equinox under this investment advisory agreement:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- -----------------
Less than -9% -0.50 x Basic Fee
Between -9% and -4.5% -0.25 x Basic Fee
Between -4.5% and 4.5% 0.00 x Basic Fee
Between 4.5% and 9% +0.25 x Basic Fee
More than 9% +0.50 x Basic Fee
--------------------------------------------------------------------------------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
Under the rules of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending July
31, 1999. Until that date, a "blended" fee rate consisting of varying
percentages of (i) the performance adjustment based on the schedule set forth
above (the "new rate"), and (ii) the performance adjustment based on the
schedule set forth in Windsor II's previous investment advisory agreement with
Equinox' (the "previous rate") shall be used as follows:
--------------------------------------------------------------------------------
' The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per quarter)
of the average month-end assets if the Fund's investment performance for the 36
months preceding the end of the quarter was between 6 and 12
2
1. QUARTER ENDING OCTOBER 31,1996. The incentive/penalty fee shall be
calculated as the sum of 8.3% (e.g., one of 12 quarters) of the fee payable
under the new rate plus 91.7% (e.g., 11 of 12 quarters) of the fee payable under
the previous rate.
2. QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 16.7% of the fee payable under the new rate plus 83.3%
of the fee payable under the previous rate.
3. QUARTER ENDING APRIL 30,1997. The incentive/penalty fee shall be
calculated as the sum of 25% of the fee payable under the new rate plus 75% of
the fee payable under the previous rate.
4. QUARTER ENDING JULY 31,1997. The incentive/penalty fee shall be
calculated as the sum of 33% of the fee payable under the new rate plus 67% of
the fee payable under the previous rate.
5. QUARTER ENDING OCTOBER 31,1997. The incentive/penalty fee shall be
calculated as the sum of 41.6% of the fee payable under the new rate plus 58.4%
of the fee payable under the previous rate.
6. QUARTER ENDING JANUARY 31,1998. The incentive/penalty fee shall be
calculated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.
7. Quarter Ending April 30,1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.
8. QUARTER ENDING JULY 31,1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus 33% of
the fee payable under the previous rate.
9. QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate and 25% of
the fee payable under the previous rate.
10. QUARTER ENDING JANUARY 31,1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate plus 16.7%
of the fee Payable under the previous rate.
11. QUARTER ENDING APRIL 30,1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate plus 8.3%
of the fee payable under the previous rate.
12. QUARTER ENDING JULY 31,1999. New rate fully operable.
--------------------------------------------------------------------------------
percentage points above or below, respectively the investment record of the
Standard & Poor's 500 Composite Stock Index (the "Index") .10% per annum (.025
per quarter) of the average month-end assets of the Fund if the Fund's
investment performance for the 36 months preceding the end of the quarter was
twelve percentage points or more above or below, respectively, the investment
record o f the Index.
3
The investment performance of the Equinox Portfolio for such period,
expressed as a percentage of the Equinox Portfolio's net asset value per share
at the beginning of such period, shall be the sum of: (i) the change in the
Equinox Portfolio's net asset value per share during such period; (ii) the value
of the Equinox Portfolio's cash distributions per share having an exdividend
date occurring within such period; and (iii) the per share amount of capital
gains taxes paid or accrued during such period by the Equinox Portfolio for
undistributed realized long-term capital gains. The foregoing notwithstanding,
any computation of the investment performance of the Equinox Portfolio and the
investment record of the Index shall be in accordance with any then applicable
rules of the Securities and Exchange Commission.
The investment record of the Index for any period, expressed as a
percentage of the Index at the beginning of such period, shall 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 shall be treated as reinvested in the Index at least as
frequently as the end of each calendar quarter following the payment of the
dividend.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the Equinox Portfolio shall
be averaged over the same period as the investment performance of the Equinox
Portfolio and the investment record of the Index are computed.
In the event of termination of this Agreement, the fee provided in this
Section shall 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 Equinox 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. STATUS OF EQUINOX. The services of Equinox to Windsor II are not to be
deemed exclusive, and Equinox shall be free to render similar services to others
so long as its services to the Equinox Portfolio are not impaired thereby.
Equinox shall be deemed to be an independent contractor and shall, unless
otherwise expressly provided or authorized, have no authority to act for or
represent the Company or Windsor II in any way or otherwise be deemed an agent
of the Company or Windsor II.
7. LIABILITY OF EQUINOX. No provision of this Agreement shall be deemed to
protect Equinox against any liability to the Company 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.
8. DURATION AND TERMINATION. This Agreement shall become effective on
August 1, 1996, and shall continue in effect until July 31, 1998, and
thereafter, only so long as such continuance is approved at least annually by
votes of the Company's Board of Directors, including the votes of a majority of
the Directors 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
4
such approval. In addition, the question of continuance of the Agreement may be
presented to the shareholders of Windsor II; in such event, such continuance
shall be effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of Windsor II.
Provided, however, that (i) this Agreement may at any time be terminated
without payment of any penalty either by vote of the Board of Directors of the
Company or by vote of a majority of the outstanding voting securities of the
Windsor II, on sixty days' written notice to Equinox, (ii) this Agreement shall
automatically terminate in the event of its assignment, and (iii) this Agreement
may be terminated by Equinox on ninety days' written notice to the Company. Any
notice under this Agreement shall 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" shall 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.
9. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
10. PROXY POLICY. With regard to the solicitation of shareholder votes,
Windsor II shall vote the shares of all Portfolio securities held by Windsor II.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed this 1st day of August, 1996.
ATTEST: VANGUARD WINDSOR FUNDS, INC.
___________________________ By:______________________________
SECRETARY PRESIDENT
ATTEST: EQUINOX CAPITAL MANAGEMENT, INC.
___________________________ By:______________________________
SECRETARY PRESIDENT
