INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 19th day of April, 2004, between VANGUARD
VARIABLE INSURANCE FUNDS, a Delaware statutory trust (the "Trust"), and Xxxxxxx
Xxxxx & Company, L.L.C., a Delaware 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 Growth Portfolio (the
"Portfolio"); and
WHEREAS, the Trust desires to retain the Advisor to render investment
advisory services to the Portfolio, and the Advisor 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 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 Portfolio 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 "WB Portfolio"). As of
the date of this Agreement, the WB Portfolio will consist of the portion of the
assets of the Portfolio that the Board of Trustees has determined to assign to
the Advisor, 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 Portfolio
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 WB Portfolio; to continuously
review, supervise, and administer an investment program for the WB 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 Portfolio with all
records concerning the activities of the Advisor that the Portfolio is required
to maintain; and to render regular reports to the Trust's officers and 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 objectives, policies and limitations set forth in the Portfolio's
prospectus and Statement of Additional Information, any additional operating
policies or procedures that the Portfolio 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.
3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the brokers
or dealers that will execute purchases and sales of securities for the WB
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 (the "SEC") or its staff, and other applicable law, the Advisor 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 Advisor
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
Advisor'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. The Advisor agrees to use its best efforts to comply
with any directed brokerage or other brokerage arrangements that the Portfolio
communicates to the Advisor in writing. The Advisor will promptly communicate to
the Trust's officers and the Board of Trustees any information relating to the
portfolio transactions the Advisor has directed on behalf of the WB Portfolio as
such officers or the Board may reasonably request.
4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor
pursuant to this Agreement, the Portfolio will pay to the Advisor, and the
Advisor agrees to accept as full compensation therefore, an investment advisory
fee at the rate specified in Schedule A to this Agreement. The fee will be
calculated based on annual percentage rates applied to the average month-end net
assets of the WB Portfolio and will be paid to the Advisor quarterly.
5. REPORTS. The Portfolio and the Advisor 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 Advisor.
6. COMPLIANCE.
6.1. COMPLIANCE WITH APPLICABLE LAW AND BOARD REQUIREMENTS. The Advisor
agrees to comply with all Applicable Law and all policies, procedures or
reporting requirements that the Board of Trustees of the Trust reasonably adopts
and communicates to the Advisor in writing, including, without limitation, any
such policies, procedures or reporting requirements relating to soft dollar or
directed brokerage arrangements.
6.2. DISCLOSURE OF COMPLIANCE MATTERS. If the Advisor receives any written
or other communication concerning or constituting a Compliance Matter, then the
Advisor shall provide the Trust a written summary of the material facts and
circumstances concerning such Compliance Matter within five (5) calendar days of
the earlier of the date on which such Compliance Matter was received by the
Advisor, or the date on which the general counsel's office of the Advisor
obtained actual knowledge of such Compliance Matter. The Advisor shall provide
the Trust with a written summary of any material changes in the facts or
circumstances concerning any Compliance Matter within (5) calendar days of the
occurrence of such changes.
2
6.3. CERTAIN DEFINITIONS. "Applicable Law" means (i) the "federal
securities laws" as defined in Rule 38a-1(e)(1) under the 1940 Act, as amended
from time to time, 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. "Compliance
Matter" means any written or other communication sent to the Advisor by any
foreign, federal or state agency or regulatory authority or any self-regulatory
authority in connection with any of the following: (i) the Advisor's compliance
with, or failure to comply with, Applicable Law as they relate to the Advisor's
investment management operations; (ii) the business or affairs of the Advisor or
any current or former client of the Advisor as they relate to the Advisor's
investment management operations; or (iii) compliance by any person other than
the Advisor with, or such person's failure to comply with, Applicable Law as
they relate to the Advisor's investment management operations.
7. STATUS OF ADVISOR. The services of the Advisor to the Portfolio 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 Portfolio are not impaired thereby. 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 Portfolio in any way or otherwise be deemed an agent of the
Portfolio or the Trust.
8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed to
protect the Advisor against any liability to the Portfolio 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 will continue in effect for a period of three
years thereafter, and shall continue in effect for successive twelve-month
periods thereafter, only so long as this Agreement 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 Portfolio; 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 Portfolio.
3
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 Portfolio, 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 Portfolio. 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 Portfolio, at:
Vanguard Variable Insurance Funds - Growth Portfolio
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Advisor, at:
Xxxxxxx Xxxxx & Company, LLC
000 Xxxx Xxxxx Xxxxxx
Xxxxxxx, Xxxxxxxx 00000
Attention: Xxxxxxxx Xxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
With a copy to:
Xxxxxxx Xxxxx & Company, LLC
000 Xxxx Xxxxx Xxxxxx
Xxxxxxx, Xxxxxxxx 00000
Attention: General Counsel
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 Portfolio of the Trust.
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.
4
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 Advisor shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
relating directly or indirectly to the Portfolio, the Trust, or Vanguard and
shall not disclose any such information to any person other than the Trust, the
Board of Directors of the Trust, 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 Advisor, or (iii) for information that is publicly
available other than due to disclosure by the Advisor or its affiliates or
becomes known to the Advisor from a source other than the Trust, the Board of
Directors of the Trust, or Vanguard.
13. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the
shares of all securities that are held by the Portfolio unless other mutually
acceptable arrangements are made with the Advisor with respect to the WB
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-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
5
IN WITNESS WHEREOF, the parties hereto have caused this Investment
Advisory Agreement to be executed as of the date first set forth herein.
XXXXXXX XXXXX & COMPANY, L.L.C. VANGUARD VARIABLE INSURANCE FUNDS
/S/ XXXXXXXX XXXXX 4/12/2004 /S/ R. XXXXXXX XXXXXX 4/8/2004
---------------------------- --------- ---------------------------- ---------
Signature Date Signature Date
Xxxxxxxx Xxxxx 4/12/2004 R. Xxxxxxx Xxxxxx 4/8/2004
---------------------------- --------- ---------------------------- ---------
Print Name Date Print Name Date
6
SCHEDULE A
Pursuant to Section 4 of the Agreement, the Fund shall pay the Advisor
compensation as follows:
14.1.CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter
of the Fund is calculated by multiplying an Annual Percentage
Rate (0.125%) to the average month-end net assets of the WB
Portfolio during such fiscal quarter, and dividing the result by
4. The Fund's fiscal quarter ends are for the months ending
March, June, September and December.
14.2.CALCULATION OF THE PERFORMANCE ADJUSTMENT. The Performance
Adjustment for each fiscal quarter of the Fund shall be
calculated by multiplying the appropriate Adjustment Percentage
(shown below) to the Annual Percentage Rate applied to the
average of the month-end net assets of the WB Portfolio over the
previous 60 months, and dividing the result by four. The
Adjustment Percentage for each fiscal quarter of the WB Portfolio
shall be determined by applying the following Performance
Adjustment Schedule to the cumulative performance of the WB
Portfolio relative to the Xxxxxxx 1000 Growth Index (the "Index")
over the rolling 60-month period applicable to such fiscal
quarter. (See Fee Example #1.)
---------------------------------------------------------------------------
PERFORMANCE ADJUSTMENT SCHEDULE
---------------------------------------------------------------------------
---------------------------------------- ----------------------------------
CUMULATIVE PERFORMANCE OF WB PORTFOLIO
VS. ADJUSTMENT PERCENTAGE
INDEX OVER APPLICABLE 60-MONTH PERIOD
---------------------------------------- ----------------------------------
---------------------------------------- ----------------------------------
More than +20% +67%
---------------------------------------- ----------------------------------
---------------------------------------- ----------------------------------
Greater than 0% up to and including +20% Linear increase between 0% to +67%
---------------------------------------- ----------------------------------
---------------------------------------- ----------------------------------
From -20% up to and including 0% Linear decrease between -67% to 0%
---------------------------------------- ----------------------------------
---------------------------------------- ----------------------------------
Less than -20% -67%
---------------------------------------- ----------------------------------
14.3.TRANSITION RULES FOR CALCULATING ADVISOR'S COMPENSATION. The
Performance Adjustment will not be fully incorporated into the
determination of the Adjusted Fee until the fiscal quarter ended
June 30, 2009. Until that date, the following transition rules
will apply:
(a) APRIL 19, 2004 THROUGH MARCH 31, 2005. The Adjusted Fee will
be deemed to equal the Base Fee. No Performance Adjustment
will apply to the calculation of the Adjusted Fee during
this period.
(b) APRIL 1, 2005 THROUGH JUNE 30, 2009. Beginning April 1,
2005, the Performance Adjustment will take effect on a
progressive basis with regard to the number of months
elapsed between June 30, 2004, and the end of the quarter
for which the Adjusted Fee is being computed. During this
period, the Base Fee for purposes of calculating the
Performance Adjustment will be computed using the average
month-end net assets of the WB Portfolio, as determined for
a period commencing July 1, 2004, and ending as of the end
of the applicable fiscal quarter of the Fund. During this
period, the Performance Adjustment will be calculated using
the cumulative performance of the WB Portfolio and the Index
for a period commencing July 1, 2004 and ending as of the
end of the applicable fiscal quarter of the Fund. For these
purposes, the endpoints and the size of the range over which
a positive or negative adjustment percentage applies and the
corresponding maximum adjusted percentage will be multiplied
by a time-elapsed fraction. The fraction will equal the
number of months elapsed since June 30, 2004, divided by 60.
(See Fee Example #2.)
A-1
(c) ON AND AFTER JUNE 30, 2009. The Adjusted Fee will be equal
to the Base Fee plus the Performance Adjustment.
14.4.OTHER SPECIAL RULES RELATING TO ADVISOR'S COMPENSATION. The
following special rules will also apply to the Advisor's
compensation:
(a) WB PORTFOLIO UNIT VALUE. The "WB Portfolio unit value" shall
be determined by dividing the total net assets of the WB
Portfolio by a given number of units. The number of units in
the WB 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 WB Portfolio, the number of units in the
WB Portfolio shall be adjusted based on the unit value of
the WB Portfolio on the day such changes are executed.
(b) WB PORTFOLIO PERFORMANCE. The investment performance of the
WB Portfolio for any period, expressed as a percentage of
the WB Portfolio unit value at the beginning of the period,
will be the sum of: (i) the change in the WB Portfolio unit
value during such period; (ii) the unit value of the Fund's
cash distributions from the WB 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
WB Portfolio, expressed as a percentage of the WB Portfolio
unit value at the beginning of such period. For this
purpose, the value of distributions of realized capital
gains per unit of the WB Portfolio, of dividends per unit of
the WB Portfolio paid from investment income, and of capital
gains taxes per unit of the WB Portfolio paid or payable on
undistributed realized long-term capital gains shall be
treated as reinvested in units of the WB Portfolio at the
unit value 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.
For purposes of calculating investment performance, the WB
Portfolio unit value will be determined net of all fees and
expenses of the Fund attributable to the WB Portfolio. Thus,
the performance of the WB Portfolio will be net of all fees
and expenses of the Fund attributable to the WB Portfolio
when compared to the Index.
A-2
(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 Index provider.
(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the WB
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
Advisor 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.
A-3
1. FEE EXAMPLE #1 - ADJUSTED FEE CALCULATION: The following example serves
as a guide for the calculation of the Adjusted Fee when the cumulative excess
return of the portfolio versus the Index falls within the linear adjustment
range: "Greater than 0% up to and including +20%".
Assume the Adjusted Fee for the fiscal quarter ending June 30, 2009 is
being calculated, the transition rules described in Schedule A, section 13.3.
are not in effect, and the month-end net assets of the WB Portfolio over the
rolling 60-month period applicable to such fiscal quarter are as follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF WB PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2004 1001 1002 1003 1004 1005 1006
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2005 1007 1008 1009 1010 1011 1012 1013 1014 1015 1016 1017 1018
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2006 1019 1020 1021 1022 1023 1024 1025 1026 1027 1028 1029 1030
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2007 1031 1032 1033 1034 1035 1036 1037 1038 1039 1040 1041 1042
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2008 1043 1044 1045 1046 1047 1048 1049 1050 1051 1052 1053 1054
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2009 1055 1056 1057 1058 1059 1060
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
Also, assume the cumulative performance of the WB Portfolio over the
rolling 60-month period applicable to such fiscal quarter is +25.0%, and the
cumulative performance of the Index over such period is +15.0%. Thus, the excess
return of the WB Portfolio over the applicable period is +10.0%. The Adjusted
Fee payable by the Fund to the Advisor for the fiscal quarter ending June 30,
2009 would be $438,817.97 and is calculated as follows:
A. BASE FEE OF $330,937.50, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the WB Portfolio over the fiscal quarter ending June 30,
2009 ($1,059,000,000), with an Annual Percentage Rate of (0.125%) applied.
Therefore, the Base Fee is equal to:
Base Fee = (a X b) /4, where;
a = Average month-end net assets over the fiscal quarter ending
June 30, 2009, calculated as follows:
($1,058,000,000 + $1,059,000,000 + $1,060,000,000) / 3 = $1,059,000,000
b = Annual Percentage Rate applied to average month end net assets,
( = 0.125%)
Base Fee = ($1,059,000,000 X 0.125%) / 4 = $330,937.50
b. PERFORMANCE ADJUSTMENT OF +$107,880.47, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the WB Portfolio over the rolling 60-month
period applicable to the fiscal quarter ending June 30, 2009 are $1,030,500,000.
The excess return of the WB Portfolio (+25.0%) over the Index (+15.0%) over such
period is +10.0%. An excess return of +10.0%, when applied to the Performance
Adjustment Schedule, corresponds to an excess return of 0% up to and including
+20%, which corresponds to an Adjustment Percentage of +33.5%. The performance
adjustment percentage is calculated as follows:
A-4
The Performance Adjustment Percentage = ([c / d] X e), where;
c = Excess return over the performance period, (= +10.0%)
d = Maximum excess return for appropriate performance range, ( =
+20.0%)
e = Maximum Adjustment Percentage for appropriate performance
range, (=+67%)
Performance Adjustment Percentage = (+10.0%/+20.0%) X +67% = +33.5%
Therefore, the Performance Adjustment = ([f X g] X h) / 4
f = Performance Adjustment Percentage, (= +33.5%)
g = Annual Percentage Rate applied to average month end net assets,
(= 0.125%)
h = Average month-end net assets for the 60-months ended June 30,
2009, (= $1,030,500,000)
Performance Adjustment = ([+33.5% X 0.125%] X $1,030,500,000) / 4 = +$107,880.47
c. AN ADJUSTED FEE OF $438,817.97, WHICH IS CALCULATED AS FOLLOWS:
Adjusted Fee = i + j, where;
i = Base Fee, ( = $330,937.50)
j = Performance Adjustment, ( = $107,880.47)
Adjusted Fee = $330,937.50 + $107,880.47 = $438,817.97
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the WB Portfolio and the
Index are treated in a symmetric manner, such as in the example.
A-5
2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The
following example serves as a guide for the calculation of the Adjusted Fee
during the transition period when the cumulative excess return of the portfolio
versus the Index falls within the linear adjustment range: "Greater than 0% up
to and including +20%".
Assume that the Advisor's compensation is being calculated for the fiscal
quarter ended December 31, 2006 and the month-end net assets of the WB Portfolio
over the 30-month period applicable to such fiscal quarter are as follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF WB PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2004 1001 1002 1003 1004 1005 1006
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2005 1007 1008 1009 1010 1011 1012 1013 1014 1015 1016 1017 1018
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2006 1019 1020 1021 1022 1023 1024 1025 1026 1027 1028 1029 1030
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
Also, assume the cumulative performance of the WB Portfolio over the 30-month
period applicable to the December 31, 2006 fiscal quarter is +18.0%, and the
cumulative performance of the Index over such period is +13.0%. Thus, the excess
return of the WB Portfolio over the applicable period is +5.0%. The Adjusted Fee
payable by the Fund to the Advisor for the fiscal quarter ending December 31,
2006 would be $374,717.58 and is calculated as follows:
A. BASE FEE OF $321,562.50, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the WB Portfolio over the fiscal quarter ending December
31, 2006 ($1,029,000,000), when applied to the Annual Percentage Rate of
(0.125%). Therefore, the Base Fee is equal to:
Base Fee = (a X b) / 4, where;
a = Average month-end net assets over the fiscal quarter ending
December 31, 2006, calculated as follows:
($1,028,000,000 + $1,029,000,000 + $1,030,000,000) / 3 = $1,029,000,000
b = Annual Percentage Rate applied to average month end net assets,
( = 0.125%)
Base Fee = ($1,029,000,000 X 0.125%) / 4 = $321,562.50
B. PERFORMANCE ADJUSTMENT OF +$53,155.08, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the WB Portfolio over the performance period
(July 1, 2004 to December 31, 2006) are $1,015,500,000. The excess return of the
WB Portfolio (+18.0%) over the Benchmark (+13.0%) over such period is +5.0%. An
excess return of +5.0%, when applied to the Performance Adjustment Schedule,
corresponds to a relative performance of 0% and up to and including +20%, which
corresponds to an Adjustment Percentage of +16.75%, calculated as follows:
A-6
The Performance Adjustment Percentage = ([c / d] X k), where;
c = Percentage amount by which the performance of the Portfolio has
exceeded the Benchmark, ( = +5.0%)
d = Maximum Transition Period excess return for appropriate
performance range, determined as follows:
[(e / f) X g], where;
e = Number of months elapsed from May 31, 2004 to November 30, 2006
(= 30)
f = Number of months in full rolling performance period (= 60)
g = Maximum excess return for appropriate performance range (=
+20.0%)
d = [(30/60) X +20.0%] = +10.0%
Maximum Transition Period Adjustment Percentage = [(e / f) X h] = k, where
e = Number of months elapsed from June 30, 2004 to December 31,
2006 (= 30)
f = Number of months in full rolling performance period (= 60)
h = Maximum Adjustment Percentage for the appropriate performance
range (= +67%)
Maximum Adjustment Percentage for transition period = [(30/60) X +67%) = +33.5%
= k
Adjustment Percentage = ([c / d]) X k) = l, therefore,
([+5.0%/+10.0%] X 33.5%) = +16.75% = l
Therefore, the Performance Adjustment is equal to ([l X m] X n) / 4, where;
l = Adjustment Percentage, ( = +16.75%)
m = Annual Percentage Rate applied to average month-end net assets,
( = 0.125%)
n = Average month-end net assets for the transition period ended
December 31, 2006, (= $1,015,500,000)
Performance Adjustment = ([+16.75% X 0.125%] X $1,015,500,000) / 4 = +$53,155.08
A-7
C. AN ADJUSTED FEE OF $374,717.58, WHICH IS CALCULATED AS FOLLOWS:
o + p = Adjusted Fee, where;
o = Base Fee, ( = $321,562.50)
p = Performance Adjustment, ( = $53,155.08)
Adjusted Fee = $321,562.50 + $53,155.08 = $374,717.58
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the WB Portfolio and the
Index are treated in a symmetric manner, such as in the example.
A-8
