FORM OF
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 3rd day of April, 2000, between VANGUARD
EXPLORER FUND, a Delaware business trust (the "Fund"), and Grantham, Mayo, Van
Otterloo & Co. LLC, a ______________ limited liability corporation ("Adviser").
WHEREAS, the Fund is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); 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 "GMO
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
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 Fund employs Adviser to manage the investment and
reinvestment of the assets of the GMO 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 GMO
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 Fund 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 GMO Portfolio for the quarter:
.275% on the first $500 million of net assets;
.225% on the next $500 million of net assets;
.200% on net assets in excess of $1 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 average net assets of the GMO Portfolio for
the 36-month period ending with the then-ended quarter, and the Adjustment will
change proportionately with the investment performance of the GMO Portfolio
relative to the investment performance of the Xxxxxxx 2000 Growth Index (the
"Index") for the same period. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE OF GMO | ADJUSTMENT AS A PERCENTAGE OF AVERAGE
PORTFOLIO VS. INDEX | ASSETS*
------------------- | -------
Trails by any amount -0.15%
Equals-to-exceeds by up to 3% Linear decrease from 0% to -0.15%
Exceeds by 3% to 6% Linear increase from 0% to +0.15%
Exceeds by more than 6% +0.15%
---------------------------
*For purposes of this calculation, the adjustment is calculated by applying the
quarterly rate against average net assets of the GMO Portfolio over the same
time period which the performance is measured.
4.1. TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Adjustment
will not be fully operable until the close of the quarter ending April 30, 2003.
Until that time, the following transition rules will apply:
(A) APRIL 3, 2000 THROUGH JANUARY 31, 2001. The Adviser's compensation
will be the Basic Fee. No Adjustment will apply during this period.
(B) FEBRUARY 1, 2001 THROUGH APRIL 30, 2003. Beginning February 1,
2001, the Adjustment will take effect on a progressive basis with regards
to the number of months elapsed between May 1, 2000, and the quarter for
which the Adviser's fee is being computed. During this period, the
Adjustment outlined in Section 4.0 will be multiplied by a fraction. The
fraction will equal the number of months elapsed since May 1, 2000, divided
by thirty-six.
2
(C) ON AND AFTER MAY 1, 2003. Commencing May 1, 2003, the 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) GMO PORTFOLIO PERFORMANCE. The investment performance of the GMO
Portfolio for any period, expressed as a percentage of the "GMO Portfolio
unit value" at the beginning of such period, shall be the sum of: (i) the
change in the GMO Portfolio unit value during such period; (ii) the unit
value of the Fund's cash distributions from the GMO 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 GMO Portfolio.
(B) "GMO PORTFOLIO UNIT VALUE."The "GMO Portfolio unit value" will be
determined by dividing the total net assets of the GMO Portfolio by a given
number of units. Initially, the number of units in the GMO Portfolio will
equal a nominal value as determined by dividing initial assets by a unit
value of $100.00 on April 3, 2000. Subsequently, as assets are added to or
withdrawn from the GMO Portfolio, the number of units of the GMO Portfolio
will be adjusted based on the unit value of the GMO Portfolio on the day
such changes are executed. Any cash buffer maintained by the Fund outside
of the GMO Portfolio shall neither be included in the total net assets of
the GMO Portfolio nor included in the computation of the GMO Portfolio Unit
Value.
(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, 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.
(D) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the GMO Portfolio and the
investment record of the Index 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 Sections 4 and 4.1 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.
3
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 or
the Fund in any way or otherwise be deemed an agent of the Fund or the Fund.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect Adviser against any liability to the Fund, 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 April
3, 2000, and will continue in effect until April 2, 2002, and 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.
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 Fund 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.
4
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 _______, 2000.
ATTEST: VANGUARD EXPLORER FUND
By ________________________ By _________________________________
Chairman, CEO and President
ATTEST: GRANTHAM, MAYO, VAN OTTERLOO & CO.
By _________________________ By __________________________________
