DRAFT
VANGUARD EXPLORER FUND
INVESTMENT ADVISORY AGREEMENT ADDENDUM
Effective January 31, 2003
This Addendum amends Section 4 of the Investment Advisory Agreement dated
April 3, 2000 between Vanguard EXPLORER FUND (the "Fund") and GRANTHAM, MAYO,
VAN OTTERLOO & CO. LLC ("GMO") as follows.
4. Compensation of GMO. For the services to be rendered by GMO as provided in
this Agreement, the Fund will pay to GMO 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, the Basic Fee, as
provided above, will be increased or decreased by applying a Performance Fee
Adjustment (the "Adjustment") based on the investment performance of the GMO
Portfolio relative to the investment performance of the Xxxxxxx 2500 Growth
Index. The investment performance of the GMO Portfolio will be based on the
cumulative return over a trailing 36-month period ending with the applicable
quarter, relative to the cumulative total return of the Xxxxxxx 2500 Growth
Index for the same time period. The Adjustment applies as follows:
Cumulative 36-Month Performance of the GMO Adjustment as a Percentage
Portfolio vs. the Xxxxxxx 2500 Growth Index of Average Net Assets*
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Trails by any amount -0.15%
Equals or exceeds by up to 3% Linear increase from -0.15% to 0%
Exceeds by 3% to 6% Linear increase from 0% to +0.15%
Exceeds by more than 6% +0.15%
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* For purposes of this calculation, the average net assets will be
calculated as average month-end net assets over the 36-month period.
4.1. Transition Rule for Calculating GMO's Compensation.
The fee structure described in Section 4 will not be
fully operable until the quarter ending January 31,
2006. Until that date, the Adjustment will be
determined by linking the investment performance of
the Xxxxxxx 2000 Growth Index and that of the Xxxxxxx
2500 Growth Index.
1. Quarter Ending April 30, 2003. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the eleven
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the one quarter ending April 30, 2003.
2. Quarter Ending July 31, 2003. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the ten
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the two quarters ending July 31, 2003.
3. Quarter Ending October 31, 2003. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the
nine quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the three quarters ending October 31, 2003.
4. Quarter Ending January 31, 2004. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the
eight quarters ending January 31, 2003, with that of the Xxxxxxx 2500
Growth Index for the four quarters ending January 31, 2004.
5. Quarter Ending April 30, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the seven
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the five quarters ending April 30, 2004.
6. Quarter Ending July 31, 2004. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the six
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the six quarters ending July 31, 2004.
7. Quarter Ending October 31, 2004. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the
five quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the seven quarters ending October 31, 2004.
8. Quarter Ending January 31, 2005. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the
four quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the eight quarters ending January 31, 2005.
9. Quarter Ending April 30, 2005. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the three
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the nine quarters ending April 30, 2005.
10. Quarter Ending July 31, 2005. The Adjustment will be determined by linking
the investment performance of the Xxxxxxx 2000 Growth Index for the two
quarters ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the ten quarters ending July 31, 2005.
11. Quarter Ending October 31, 2005. The Adjustment will be determined by
linking the investment performance of the Xxxxxxx 2000 Growth Index for the
one quarter ending January 31, 2003, with that of the Xxxxxxx 2500 Growth
Index for the eleven quarters ending October 31, 2005.
12. Quarter Ending January 31, 2006. The benchmark transition is complete.
No Effect on Other Provisions. Except with respect to these fee schedules, all
other provisions of the Investment Advisory Agreement dated April 3, 2000 remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed this ______ day of __________, 200_.
VANGUARD EXPLORER FUND
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Chairman, CEO and President
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By ____________________________________________
Title___________________________________________
