INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of November, 2000, between the
DIVERSIFIED VALUE PORTFOLIO of VANGUARD VARIABLE INSURANCE FUND, a Delaware
business trust (the "Trust"), and BARROW, HANLEY, XXXXXXXXX & xxxxxxx, inc., a
Nevada corporation (the "Adviser"), which is wholly owned by United Asset
Management Corporation, a Delaware corporation (the "Adviser's Parent").
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, the Trust has retained the Adviser to render investment
advisory services to its Diversified Value Portfolio (the "Fund") under a prior
investment advisory agreement dated November 9, 1998, as amended December 16,
1999 (the "Prior Agreement");
WHEREAS, the Adviser's Parent was acquired on October 5, 2000 by Old
Mutual plc, an international financial services group based in London, England
and such acquisition resulted in an "assignment" of the Prior Agreement within
the meaning of Section 2(a)(4) of the 1940 Act; and
WHEREAS, the Trust and Adviser wish to continue the advisory
relationship without interruption by entering into a new investment advisory
agreement that is substantially identical to the Prior Agreement;
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 Trust hereby employs Adviser as investment
adviser, on the terms and conditions set forth herein, for the assets of the
Fund that the Trust's Board of Trustees (the "Board of Trustees") determines to
assign to Adviser (referred to in this Agreement as the "BHMS Portfolio"). 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 Trust employs Adviser to manage the investment
and reinvestment of the assets of the BHMS Portfolio; to continuously review,
supervise, and administer an investment program for the BHMS 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 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, 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 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 BHMS
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 pursuant to written policies and procedures
provided to Adviser. Subject to policies established by the Board of Trustees,
Adviser may also be authorized to effect individual securities transactions at
commission rates in excess of the minimum commission rates available, if Adviser
determines in good faith that such amount of commission is 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
Adviser's overall responsibilities with respect to the accounts as to which
Adviser exercises investment discretion. 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. Adviser will promptly communicate to the Fund's
officers and the Board of Trustees such information relating to portfolio
transactions as they may reasonably request.
4. COMPENSATION OF ADVISER. For 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 an annual percentage rate of 0.125%, to the average month-end net
assets of the BHMS Portfolio for the quarter.
The Basic Fee, as provided above, will be increased or decreased by
applying a Performance Fee Adjustment (the "Adjustment") based on the cumulative
investment performance of the BHMS Portfolio over a trailing 36-month period
relative to that of the Standard & Poor's/BARRA Value Index (the "Index") over
the same period. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
BHMS PORTFOLIO VS. INDEX PERCENTAGE OF BASIC FEE*
------------------------ ------------------------
Exceeds by +9% or more +25%
Exceeds by more than +6% but less than +9% +15%
Trails/exceeds from -6% through +6% 0%
Trails by more than -6% but less than -9% -15%
Trails by -9% or more -25%
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* For purposes of the Adjustment calculation, the Basic Fee is
calculated by applying the above rate schedule against the average net
assets of the BHMS Portfolio over the same period for which the
performance is measured.
4.1. TRANSITION RULES FOR CALCULATING ADVISER'S COMPENSATION. The
Adjustment set forth in Section 4 of this Agreement shall not be fully operable
until the close of the calendar quarter ending March 31, 2002. Until that date,
the following transition rules will apply:
(a) FEBRUARY 8, 1999 THROUGH THE QUARTER ENDING DECEMBER 31, 1999.
Adviser's compensation was the Basic Fee. No Adjustment was applied
during this period.
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(b) JANUARY 1, 2000 THROUGH THE QUARTER ENDING MARCH 31, 2002. Beginning
with the quarter ending March 31, 2000, the Adjustment will take
effect on a progressive basis with regards to the number of months
elapsed between February 8, 1999, and the quarter for which Adviser's
fee is computed. During this period, the +/-9% hurdle rate, as well as
the Adjustment described in Section 4.0, will be multiplied by a
fraction, which will equal the number of months elapsed since March
31, 1999, divided by 36.
(c) ON AND AFTER APRIL 1, 2002. The Adjustment 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 Adviser's compensation:
(a) BHMS PORTFOLIO UNIT VALUE. The "BHMS Portfolio unit value" shall be
determined by dividing the total net assets of the BHMS Portfolio by a
given number of units. The number of units in the BHMS 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 BHMS Portfolio, the number of units of the BHMS
Portfolio shall be adjusted based on the unit value of the BHMS
Portfolio on the day such changes are executed.
(b) BHMS PORTFOLIO PERFORMANCE. The investment performance of the BHMS
Portfolio for any period, expressed as a percentage of the BHMS
Portfolio unit value at the beginning of the period, will be the sum
of: (i) the change in the BHMS Portfolio unit value during such
period; (ii) the unit value of the Fund's cash distributions from the
BHMS 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 BHMS Portfolio,
expressed as a percentage of the BHMS Portfolio unit value at the
beginning of such period. For this purpose, the value of distributions
of realized capital gains per unit of the BHMS Portfolio, of dividends
per unit of the BHMS Portfolio paid from investment income, and of
capital gains taxes per unit of the BHMS Portfolio paid or payable on
undistributed realized long-term capital gains shall be treated as
reinvested in units of the BHMS 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.
(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
Standard and Poor's.
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(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the BHMS 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 elapsed in the current fiscal quarter as a percentage of the
total number of days in such quarter.
5. REPORTS. The Fund and Adviser agree to furnish to each other with
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 information about
changes in ownership of Adviser.
6. COMPLIANCE. Adviser agrees to comply with all policies, procedures, or
reporting requirements that the Board of Trustees 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 Trust or
the Fund in any way or otherwise be deemed an agent of the Trust or the Fund.
8. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad
faith, or gross negligence on the part of Adviser in performance of its
obligations and duties hereunder; (ii) reckless disregard by Adviser of its
obligations and duties hereunder; or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the 1940 Act), Adviser shall not be subject to
any liability whatsoever to the Fund, or to any shareholder of the Fund, for any
error or judgment, mistake of law, or any other act or omission in the course
of, or connected with, rendering services hereunder, including, without
limitation, for any losses that may be sustained in connection with the
purchase, holding, redemption, or sales of any security on behalf of the Fund.
9. DURATION AND TERMINATION. This Agreement will become effective on
November 1, 2000, and will continue in effect thereafter, only so long as such
continuance is approved at least annually by votes of the 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, a continuance will be effected only if
approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund.
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However this Agreement (i) may at any time be terminated without payment of
any penalty either by vote of the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund, on sixty days' written notice to
Adviser; (ii) will automatically terminate in the event of its assignment; and
(iii) 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,"
and 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 1940 Act.
10. SEVERABILITY. If any provision of this Agreement is held to be or made
invalid by a court decision, statute, rule, or otherwise, the remainder of this
Agreement will not be affected thereby.
11. PROXY POLICY. With regard to the solicitation of shareholder votes, the
Fund will vote the shares of all securities held by the Fund.
12. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed this 1st day of November, 2000.
ATTEST: VANGUARD VARIABLE INSURANCE FUND
By /S/ Xxxxxxx Xxxxxx By /S/ Xxxx X. Xxxxxxx
Chairman, CEO and President
ATTEST: BARROW, HANLEY, XXXXXXXXX & XXXXXXX, INC.
By _________________________ By /S/ Xxxxx X. Xxxxxx
President
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