INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 27th day of May, 2003, between VANGUARD
SPECIALIZED FUNDS, a Delaware statutory trust, (the "Trust") and WELLINGTON
MANAGEMENT COMPANY, LLP, a Massachusetts partnership (the "Adviser").
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 Dividend
Growth Fund (the "Fund"); and
WHEREAS, the Trust desires to retain the Adviser to render investment
advisory services to the Fund, and the Adviser is willing to render such
services.
NOW THEREFORE, in consideration of the mutual promises and undertakings set
forth in this Agreement, the Trust and the Adviser hereby agree as follows:
1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser as
investment adviser, 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 Adviser from time to time (referred to in this
Agreement as the "Wellington Management Portfolio"). As of the date of
this Agreement, the Wellington Management Portfolio will consist of
all of the assets of the Fund. The Board of Trustees may, from time to
time, make additions to, and withdrawals from, the assets of the Fund
assigned to the Adviser. The Adviser accepts such employment and
agrees to render the services herein set forth, for the compensation
herein provided.
2. DUTIES OF ADVISER. The Trust employs the Adviser to manage the
investment and reinvestment of the assets of the Wellington Management
Portfolio; to continuously review, supervise, and administer an
investment program for the Wellington Management 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 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. The Adviser will discharge the foregoing
responsibilities subject to the supervision and oversight of the
Fund's officers and the Board of Trustees, and in compliance with the
objectives, 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
Adviser in writing, and applicable laws and regulations. The 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. The Adviser is authorized to select the
brokers or dealers that will execute purchases and sales of securities
for the Wellington Management Portfolio, and is directed to use its
best efforts to obtain the best available price and most favorable
execution for such transactions. To the extent expressly permitted by
the written policies and procedures established by the Board of
Trustees, and subject to Section 28(e) of the Securities Exchange Act
of 1934, as amended, any interpretations thereof by the Securities and
Exchange Commission or its staff, and other applicable law, the
Adviser is permitted to pay a broker or dealer an amount of commission
for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
that transaction if the Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Adviser's
overall responsibilities to the accounts as to which it exercises
investment discretion. The execution of such transactions in
conformity with the authority expressly referenced in the immediately
preceding sentence shall not be deemed to represent an unlawful act or
breach of any duty created by this Agreement or otherwise. Subject to
the first sentence of this Section 3, the Adviser agrees to comply
with any reasonable directed brokerage or other brokerage policies and
procedures that the Fund communicates to the Adviser in writing. The
Adviser will promptly communicate to the Fund's officers and the Board
of Trustees any information relating to the portfolio transactions the
Adviser has directed on behalf of the Wellington Management Portfolio
as such officers or the Board may reasonably request.
4. COMPENSATION OF ADVISER. For the services to be rendered by the
Adviser as provided in this Agreement, the Fund will pay to the
Adviser at the end of each of the Fund's fiscal quarters an amount
(the "Adjusted Fee") equal to a basic fee ("Basic Fee") plus a
performance adjustment amount ("Adjustment Amount"). For purposes of
the calculations, both the Basic Fee and the Adjustment Amount will
incorporate an asset-based fee ("Asset Fee") that is determined by
applying a quarterly rate, calculated based on the following annual
percentage rate schedule, to the average month-end net assets of the
Wellington Management Portfolio over the applicable time period:
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ANNUAL PERCENTAGE RATE SCHEDULE
-----------------------------------------------------------
Annual Percentage Average Month-End
Rate Net Assets
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0.125% On the first $1 billion
0.100% On the next $4 billion
0.080% Over $5 billion
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The Basic Fee is equal to the Asset Fee as computed over the fiscal quarter for
which the Adjusted Fee is being calculated ("Relevant Fiscal Quarter").
Subject to the transition rules described below, the Adjustment Amount is
equal to the product of an adjustment percentage ("Adjustment Percentage") and
the Asset Fee as computed over the 36-month period ending with the Relevant
Fiscal Quarter ("Relevant 36-Month Period"). The Adjustment Percentage will vary
based on the investment performance of the Wellington Management Portfolio
relative to the investment performance of the Xxxxxxx 1000 Index (the "Index")
as determined for the Relevant 36-Month Period. The Adjustment Percentage
applies as follows:
------------------------------------------------------------ -------------------
CUMULATIVE PERFORMANCE OF
WELLINGTON MANAGEMENT PORTFOLIO VS. INDEX ADJUSTMENT PERCENTAGE(1)
OVER RELEVANT 36-MONTH PERIOD
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Less than -6% -0.50 x Basic Fee
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From -6% up to and including -3% -0.25 x Basic Fee
--------------------------------------------------------------------------------
Between -3% and +3% 0.00 x Basic Fee
--------------------------------------------------------------------------------
From +3 up to and including +6% +0.25 x Basic Fee
--------------------------------------------------------------------------------
More than +6% +0.50 x Basic Fee
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4.1. TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Adjustment
Amount will not be fully incorporated into the determination of the Adjusted Fee
until May 31, 2006. Until that date, the following transition rules will apply:
(a) MAY 31, 2003 THROUGH JANUARY 31, 2004. The Adjusted Fee will be equal to
the Basic Fee. No Adjustment Amount will apply during this period.
(b) FEBRUARY 1, 2004 THROUGH MAY 31, 2006. Beginning February 1, 2004, the
Adjustment will take effect on a progressive basis with regards to the
number of months elapsed between May 31, 2003, and the end of the quarter
for which Adviser's fee is being computed. During the period, the
Adjustment will be calculated using cumulative performance of the
Wellington Management Portfolio and the Index from May 31, 2003 through the
end of the applicable quarter. For these purposes, the endpoints and size
of the range over which a positive or negative Adjustment applies and the
corresponding maximum fee adjustment amount will be multiplied by a
fractional time-elapsed adjustment. The fraction will equal the number of
months elapsed since May 31, 2003, divided by thirty-six.
Example: Assume that the Adviser's compensation is being
calculated for the quarter ended July 31, 2005, and that the
cumulative performance of the Wellington Management Portfolio
versus the Index for the applicable period is +5.0%. In this
case, an Adjustment of +36.11% would apply. The following
demonstrates the calculation: Calculate the fractional
time-elapsed adjustment by dividing 26 months by 36 months
(equals 72.22%), then multiply by the endpoints for the range
over which the positive or negative Adjustment applies [(26/36) x
3.0% to (26/36) x 6.0% = 2.16% to 4.33%]. Given the portfolio's
cumulative performance of +5.0% is greater than the time-elapsed
adjusted range of +2.16% to +4.33%, multiply the fractional
time-elapsed adjustment of 72.22% by the corresponding maximum
adjustment for the time-elapsed adjusted range of greater than
+4.33% or (72.22%)(50.0%) = +36.11%. (Note: actual calculations
will be rounded to the third decimal point.)
----------------
(1) For purposes of applying the Adjustment, the Basic Fee will be calculated
based on average month-end net assets over the same time period for which
performance is measured.
(C) ON AND AFTER JUNE 1, 2006. The Adjusted Fee will be fully operable at this
time.
4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
(a) WELLINGTON MANAGEMENT PORTFOLIO UNIT VALUE. The "Wellington Management
Portfolio unit value" shall be determined by dividing the total net assets
of the Wellington Management Portfolio by a given number of units. The
number of units in the Wellington Management Portfolio shall be equal to
the total shares outstanding of the Fund on the effective date of this
Agreement; provided, however, that as assets are added to or withdrawn from
the Wellington Management Portfolio, the number of units of the Wellington
Management Portfolio shall be adjusted based on the unit value of the
Wellington Management Portfolio on the day such changes are executed.
(b) WELLINGTON MANAGEMENT PORTFOLIO PERFORMANCE. The investment performance of
the Wellington Management Portfolio for any period, expressed as a
percentage of the Wellington Management Portfolio unit value at the
beginning of the period, will be the sum of: (i) the change in the
Wellington Management Portfolio unit value during such period; (ii) the
unit value of the Fund's cash distributions from the Wellington Management
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 by the Wellington Management Portfolio, expressed as a
percentage of the Wellington Management Portfolio unit value at the
beginning of such period. For this purpose, the value of distributions of
realized capital gains per unit of the Wellington Management Portfolio, of
dividends per unit of the Wellington Management Portfolio paid from
investment income, and of capital gains taxes per unit of the Wellington
Management Portfolio paid or payable on undistributed realized long-term
capital gains shall be treated as reinvested in units of the Wellington
Management Portfolio at the unit value in effect at the close of business
on the record date for the payment of such distributions and dividends
(which date shall be the relevant ex-dividend date) and the date on which
provision is made for such taxes, after giving effect to such
distributions, dividends, and taxes.
(c) INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index level at the beginning of such
period, will 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 make up the Index. For this purpose,
cash distributions on the securities that make up 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, and consistent with the
methodology used by the Xxxxx Xxxxxxx Company to calculate Index returns.
(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation of
the investment performance of the Wellington Management 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 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 the Adviser performed services
hereunder during the fiscal quarter in which such termination becomes effective
as a percentage of the total number of days in such quarter.
5. Reports. The Fund and the 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, including, but not limited to, information about changes in
partners of the Adviser (to the extent applicable).
6. COMPLIANCE. The Adviser agrees to comply with all policies, procedures
or reporting requirements that the Board of Trustees of the Trust
reasonably adopts and communicates to the Adviser in writing,
including, without limitation, any such policies, procedures or
reporting requirements relating to soft dollar or directed brokerage
arrangements.
7. STATUS OF ADVISER. The services of the Adviser to the Fund are not to
be deemed exclusive, and the Adviser will be free to render similar
services to others so long as its services to the Fund are not
impaired thereby. The 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 or the Trust.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect the 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. FORCE MAJEURE. The Adviser shall not be responsible for any loss or
damage, or failure to comply or reasonable delay in complying with any
duty or obligation, under or pursuant to this Agreement arising as a
direct or indirect result of any reason, cause or contingency beyond
its reasonable control, including (without limitation) natural
disasters, nationalization, currency restrictions, act of war, act of
terrorism, act of God, postal or other strikes or industrial actions,
or the failure, suspension or disruption of any relevant stock
exchange or market. The Adviser shall notify the Fund promptly when it
becomes aware of any event described above. The Fund shall not be
responsible for temporary delays in the performance of the Fund's
duties and obligations hereunder and correspondingly
shall not be liable for any loss or damage attributable to such delay
in consequence of any event described above.
10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will become
effective on the date hereof and will continue in effect for a period
of two years thereafter, and shall continue in effect for successive
twelve-month periods thereafter, only so long as each such successive
continuance is approved at least annually by votes of the Trust'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.
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 of the Trust or by vote of a majority of the outstanding voting
securities of the Fund, on sixty days' written notice to the Adviser, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the 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 as follows:
If to the Fund, at:
Vanguard Dividend Growth Fund
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Portfolio Review Group
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Adviser, at:
Wellington Management Company, LLP
00 Xxxxx Xxxxxx
Xxxxxx, XX 00000
Attention: Xxxx X. 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 of the Trust.
1
As used in this Section 9, 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. The Adviser shall keep confidential any and all
information obtained regarding the Trust or The Vanguard Group, Inc.
in connection with the services rendered hereunder and shall not
disclose any such information to any person other than the Trust, the
Board of Directors of the Trust, The Vanguard Group, Inc.
("Vanguard"), and any director, officer, or employee of the Trust or
Vanguard, except (i) with the prior written consent of the Trust, (ii)
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 Adviser, or (iii) for
information that is publicly available other than due to disclosure by
the Adviser or its affiliates or becomes known to the Adviser from a
source other than the Trust, the Board of Directors of the Trust, or
Vanguard.
13. PROXY POLICY. The Adviser acknowledges that The Vanguard Group, Inc.
will vote the shares of all securities that are held by the Fund
unless other mutually acceptable arrangements are made with the
Adviser with respect to the Wellington Management Portfolio.
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-interest law principles
thereof) of the State of Delaware applicable to contracts made and to
be performed in that state.
IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory
Agreement to be executed as of the date first set forth herein.
WELLINGTON MANAGEMENT VANGUARD SPECIALIZED FUNDS
COMPANY, LLP
/S/ XXXXX X. XXXXXXXX 5/15/03 /S/ XXXX X. XXXXXXX 5/16/03
Signature Date Signature Date
Xxxxx X. Xxxxxxxx President Xxxx X. Xxxxxxx President and CEO
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