Exhibit (d)(2)
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
XXX XXXXXX ASSET MANAGEMENT
AND
XXXXXX XXXXXXX INVESTMENT MANAGEMENT LIMITED
THIS AGREEMENT is made as of this ____ day of ___________________ by and
between XXX XXXXXX ASSET MANAGEMENT ("VKAM") a Delaware statutory trust, and
XXXXXX XXXXXXX INVESTMENT MANAGEMENT LIMITED (the "LOCAL MANAGER"), a company
organized under the laws of England.
WHEREAS, VKAM acts as investment adviser to Xxx Xxxxxx Trust II (the
"TRUST") and its series Xxx Xxxxxx Global Bond Fund (the "FUND");
WHEREAS, the Local Manager has available a staff of experienced investment
personnel and facilities for providing investment sub-advisory services to the
Fund;
WHEREAS, the Local Manager is an investment adviser registered under the
Investment Advisers Act of 1940, as amended, and is willing to provide VKAM with
investment management services on the terms and conditions hereinafter set forth
and including the terms and conditions contained in Annex 1 to this Agreement
(to the extent there is any inconsistency between the terms and conditions in
the main body of this Agreement and in Annex 1 to this Agreement, the terms and
conditions in Annex 1 shall prevail); and
WHEREAS, VKAM and the Local Manager (jointly referred to as the "ADVISERS")
desire to enter into an agreement for the Local Manager to provide investment
management services to the Trust and to VKAM with respect to the investment of
the assets of the Fund.
NOW THEREFORE it is mutually agreed:
1. INVESTMENT MANAGEMENT SERVICES.
(a) Investment Management
(i) Subject to the overall policies, control, direction and review of
the Trust's Trustees and VKAM, the Local Manager shall act as discretionary
investment manager to VKAM and manage the investment and reinvestment of
the assets of the Fund, continuously review, supervise and administer the
investment program of the Fund, determine in its discretion the securities
to be purchased or sold and the portion of the Fund's assets to be held
uninvested, to provide the Trust with records concerning the Local
Manager's activities which the Trust is required to maintain, and to render
regular reports to the Trust's officers and Board of Trustees concerning
the Local Manager's discharge of the foregoing responsibilities. VKAM and
its affiliates shall for all purposes herein be deemed a professional
client as defined under the rules and guidance promulgated by the Financial
Services Authority (hereinafter referred to as the "FSA RULES"). VKAM has
the right to request to be treated as a retail client. Classification as a
retail client requires the Local Manager to exercise a higher level of
protective care under the regulatory system. However, the Local Manager is
not obliged to accept any such request. VKAM should be aware that
professional clients will not be entitled to certain protections afforded
by the FSA Rules to retail clients. For the avoidance of doubt, the Local
Manager will
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only treat the Client (but not the Trust or the Fund) as its customer from
both a regulatory and a contractual perspective.
The Local Manager and its affiliates shall for all purposes herein be
deemed to be an independent contractor and shall, 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.
(ii) Subject to the Fund's investment guidelines, the Local Manager
shall have full discretion, power and authority on the Fund's behalf to
buy, sell, retain, exchange or otherwise deal in investments and other
assets, make deposits, subscribe to issues and offers for sale and accept
placings of any investments, enter into foreign currency transactions on a
spot or forward basis, effect transactions on any markets, take all day to
day decisions and otherwise act as the Local Manager judges appropriate in
relation to the investment and reinvestment of assets of the Fund. This
includes performing all acts and executing all documents which the Local
Manager reasonably considers incidental thereto, including (without
limitation) power to execute and deliver all applications, requests, or
claims for refund, reduction, repayment or credit of, or exemption or
relief from, any withholding tax or similar taxes in any jurisdiction in
which such applications, requests or claims may be made. Subject to
guidelines adopted by the Fund, the Local Manager shall also make
recommendations or take action as to the manner in which voting rights,
rights to consent to corporate action and any other rights pertaining to
the assets of the Fund shall be exercised.
(iii) In performing these services, the Local Manager shall always
adhere to the restrictions of the Trust's Declaration of Trust and By-Laws,
as they may be amended and/or restated from time to time and as provided to
the Local Manager by VKAM, the provisions of the Investment Company Act of
1940 (the "1940 ACT") and the statements relating to the Fund's respective
investment objective(s), investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement
of additional information relating to the shares of the Fund under the
Securities Act of 1933, as amended (the "PROSPECTUS" and "STATEMENT OF
ADDITIONAL INFORMATION", respectively), as well as to the supervision of
VKAM and the Board of Trustees of the Trust.
(iv) Unless otherwise instructed by VKAM or the Trustees, and subject
to the provisions of this Agreement and to any guidelines or limitations
specified from time to time by VKAM or by the Trustees, the Local Manager
shall have executed and performed on behalf of and at the expense of the
Fund:
(1) Purchases, sales, exchanges, conversions, and placement or
orders for execution; and
(2) Reporting of all transactions to VKAM and to other entities
as directed by VKAM or by the Trustees.
(v) The Local Manager shall provide the Trustees at least quarterly,
in advance of the regular meetings of the Trustees, a report of its
activities hereunder on behalf of the Trust and the Fund and the Local
Manager's proposed strategy for the next quarter, all in such form and
detail as requested by the Trustees. The Local Manager shall also make an
investment officer available to attend such meetings of the Trustees as the
Trustees may reasonably request.
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(vi) The Local Manager may, where reasonable, employ agents (including
affiliates) to perform any administrative, dealing or ancillary services
required to enable the Local Manager to perform its services under this
Sub-Advisory Agreement.
(b) Restriction of the Local Manager's Powers
(i) In carrying out its duties hereunder, the Local Manager shall
comply with all reasonable instructions of the Trust or VKAM in connection
therewith. Such instructions may be given by letter, telex, telefax or
telephone confirmed by telex, by the Trustees or by any other person
authorized by a resolution of the Trustees provided a certified copy of
such resolution has been supplied to the Local Manager.
(ii) All securities, cash and other assets of the Fund shall be placed
and maintained in the care of a member bank of the Federal Reserve System
of the United States approved by the Trustees as custodian and one or more
"Eligible Foreign Custodians" (as defined in Rule 17f-5 under the
Investment Company Act.
(iii) Persons authorized by resolution of the Trustees shall have the
right to inspect and copy contracts, notes, vouchers, and copies of entries
in books or electronic recording media relating to the Trust's transactions
at the registered office of the Local Manager at any time during normal
business hours provided that reasonable prior notice of such inspection is
provided to the Local Manager. Such records, in relation to each
transaction effected by the Local Manager on behalf of the Trust shall be
maintained by the Local Manager for a period of seven years from the date
of such transaction.
(c) Purchase and Sale of Securities
In performing the services described above, the Local Manager shall use its
best efforts to obtain for the Fund the most favorable price and execution
available. Subject to prior authorization of appropriate policies and procedures
by the Trustees, the Local Manager may, to the extent authorized by the FSA
Rules, cause the Fund to pay a broker or dealer who provides brokerage and
research services an amount of commission for effecting the Fund's investment
transactions in excess of the amount of commission another broker or dealer
would have charged for effecting such transactions, in recognition of the
brokerage and research services provided by the broker or dealer. To the extent
authorized by law, the Local Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of such action.
(d) Custodian
The Local Manager shall not act as custodian for the securities or any
other assets of the Trust. All such assets shall be held by the custodian or
sub-custodian appointed by the Trustees or by the Fund's "Foreign Custody
Manager" (as defined by Rule 17f-5 under the 1940 Act).
2. DUTIES OF VKAM.
(a) Provision of Information
VKAM shall advise the Local Manager from time to time with respect to each
Fund of its investment objective and policies and of any changes or
modifications thereto, as well as any specific investment restrictions and
limitations by sending to the Local Manager a copy of each registration
statement and amendment thereto relating to the Trust as filed with the
Securities and Exchange
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Commission, provided that the Local Manager is not obliged to follow any
amendment until such amendment is acknowledged and agreed to in writing by the
Local Manager. As requested by the Local Manager, VKAM shall furnish such
information to the Local Manager as to holdings, purchases, and sales of the
securities under its management as will reasonably enable the Local Manager to
furnish its discretionary investment management services under this Agreement.
(b) Compensation to the Local Manager
For the services rendered, the facilities furnished and expenses assumed by
the Local Manager, VKAM shall pay to the Local Manager a fee in an amount to be
determined from time to time by VKAM and the Local Manager but in no event in
excess of the amount that VKAM actually received for providing services to the
Trust pursuant to the investment advisory agreement between VKAM and the Fund.
3. MISCELLANEOUS.
(a) Activities of the Local Manager
The services of the Local Manager as sub-adviser to VKAM under this
Agreement are not to be deemed exclusive, the Local Manager and its affiliates
being free to render services to others. It is understood that shareholders,
directors, officers and employees of the Local Manager may become interested in
the Trust or VKAM as shareholders, directors, officers, partners or otherwise.
(b) Limitation of Liability of the Local Manager
No warranty is given by the Local Manager as to the performance or
profitability of the Fund or any part of them.
If a percentage restriction contained in the Fund's investment objective(s)
or investment restrictions (as the same are set forth in the Fund's currently
effective Prospectus and Statement of Additional Information) is adhered to at
the time of investment, a later change in percentage resulting from a change in
values or assets will not constitute a violation of such restriction.
The Local Manager will not be responsible to VKAM or the Fund for the
solvency, actions or omissions of any counterparty, broker, dealer,
market-maker, bank, custodian or sub-custodian, with whom it transacts business
on VKAM's behalf, other than affiliates of the Local Manager.
Nothing in this Agreement will exclude or restrict any liability which the
Local Manager has under the Financial Services and Markets Xxx 0000, FSA Rules
or the Regulatory System (as defined in the FSA Rules) in relation to VKAM and
which may not be excluded or restricted there under.
The Local Manager shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the performance of investment management services rendered with respect to
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties hereunder. The exception in the previous sentence shall apply to each
limitation of the Local Manager's liability contained in this Section 3(b). As
used in this Section 3(b), the Local Manager shall include any affiliates of the
Local Manager performing services for the Local Manager contemplated hereby and
directors, officers and employees of the Local Manager and such affiliates.
(c) Services to Other Clients
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VKAM acknowledges that the Local Manager may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services for, other individuals or entities ("Clients"). Subject to the
provisions of this paragraph, VKAM agrees that the Local Manager may give advice
or exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Trust, provided that the Local Manager acts in
good faith, and provided, further, that it is the Local Manager's policy to
allocate, within its reasonable discretion, investment opportunities to the Fund
over a period of time on a fair and equitable basis relative to the Clients,
taking into account the investment objectives and policies of the Fund and any
specific investment restrictions and limitations applicable thereto. VKAM
acknowledges that one or more of the Clients may at any time hold, acquire,
increase, decrease, dispose of or otherwise deal with positions in investments
in which the Fund may have an interest from time to time, whether in
transactions which may involve the Fund or otherwise. The Local Manager shall
have no obligation to acquire for any Fund a position in any investment which
any Client may acquire, and VKAM shall have no first refusal, coinvestment or
other rights in respect of any such investment, either for the Fund or
otherwise.
(d) Best Efforts
It is understood and agreed that in furnishing the investment advice and
other services as herein provided, the Local Manager shall use its best
professional judgment to perform its obligations hereunder which will provide
favorable results for the Fund. The Local Manager shall not be liable to the
Trust or to any shareholder of the Trust to any greater degree than VKAM , and
VKAM shall indemnify and hold the Local Manager harmless against any loss,
liability or cost incurred by the Local Manager towards the Trust or to any
shareholder of the Trust except to the extent that such loss, liability or cost
arises from the Local Manager's fraud, willful misfeasance, bad faith or gross
negligence in the performance of the Local Manager's duties hereunder.
(e) Compliance with Applicable Laws and Regulations.
The Local Manager shall obtain and at all times maintain and comply with
the terms of all relevant authorizations, licenses, consents, approvals and
registrations and comply with all relevant laws and regulations, necessary for
the purpose of performing any of its duties and obligations under this
Agreement. The Local Manager shall inform VKAM as soon as possible if at any
time the Local Manager becomes unable to comply with the terms of or maintain
any such authorizations, licenses, consents, approvals or registrations.
(f) Duration of Agreement
(i) This Agreement, unless terminated pursuant to paragraph (ii),
(iii) or (iv) below, shall continue in effect for two years from the date
hereof, and thereafter shall continue in effect from year to year, provided
that its continued applicability is specifically approved at least annually
by the Trustees or by a vote of the holders of a majority of the
outstanding shares of the Fund. In addition, such continuation shall be
approved by vote of a majority of the 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 approval. As used in this
paragraph, the term "interested person" shall have the same meaning as set
forth in the 1940 Act.
(ii) This Agreement may be terminated by sixty (60) days' written
notice by either VKAM or the Local Manager to the other party, provided
that VKAM's termination of this Agreement shall be approved by vote of a
majority of the Trustees who are not parties to this Agreement or
interested persons of any such party. The Agreement may also be terminated
at
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any time, without the payment of any penalty, with respect to the Fund (by
vote of the Trustees or, by the vote of a majority of the outstanding
voting securities of the Fund), on sixty (60) days' written notice to both
VKAM and the Local Manager. This Agreement shall automatically terminate in
the event of the termination of the investment advisory agreement between
VKAM and the Trust.
(iii) This Agreement shall terminate in the event of its assignment.
The term "assignment" for this purpose shall have the same meaning set
forth in Section 2(a)(4) of the 1940 Act.
(iv) This Agreement shall terminate forthwith by notice in writing on
the happening of any of the following events:
(1) If VKAM or the Local Manager shall go into liquidation
(except a voluntary liquidation for the purpose of and followed by a bona fide
reconstruction or amalgamation upon terms previously approved in writing by the
party not in liquidation) or if a receiver or receiver and manager of any of the
assets of either of them is appointed; or
(2) If either of the parties hereto shall commit any breach of
the provisions hereof and shall not have remedied such breach within 30 days
after the service of notice by the party not in breach on the other requiring
the same to be remedied.
(v) Termination shall be without prejudice to the completion of any
transactions which the Local Manager shall have committed to on behalf of
the Fund prior to the time of termination. The Local Manager shall not
effect and the Trust shall not be entitled to instruct the Local Manager to
effect any further transactions on behalf of the Fund subsequent to the
time termination takes effect.
(vi) On the termination of this Agreement and completion of all
matters referred to in the foregoing paragraph (v) the Local Manager shall
deliver or cause to be delivered to the Trust copies of all documents,
records and books of the Trust required to be maintained pursuant to Rules
31 a-1 or 31 a-2 of the 1940 Act which are in the Local Manager's
possession, power or control and which are valid and in force at the date
of termination.
(g) Notices
Any notice, request, instruction, or other document to be given under this
Agreement by any party hereto to the other parties shall be in writing and
delivered personally or sent by mail or telecopy (with a hard copy to follow):
If to the Local Manager to:
Xxxxxx Xxxxxxx Investment Management Limited
00 Xxxxx Xxxxxx
Xxxxxx Xxxxx, Xxxxxx
Xxxxxx Xxxxxxx, X00 0XX
If to VKAM, to:
Xxx Xxxxxx Asset Management
000 Xxxxx Xxxxxx
0
Xxx Xxxx, Xxx Xxxx 00000
Attention: Chief Legal Officer, Xxx Xxxxxx Funds
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agent for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be presumed to have
been duly given to the party to which it is addressed, on the date three (3)
days after mailing, and in the case of delivery by telecopy, on the date the
hard copy is received.
(h) Choice of Law
This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of the United
States and the State of New York, without regard to the conflicts of laws
principles thereof.
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IN WITNESS WHEREOF, the Agreement has been executed as of the date first
above given.
XXX XXXXXX ASSET MANAGEMENT XXXXXX XXXXXXX INVESTMENT
MANAGEMENT LIMITED
By: By:
---------------------------------- -------------------------------------
Name: Xxxxxx X. Xxxx, III Name: Xxxxxx Onslow
Title: Managing Director and CAO Title: Director
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SUB-ADVISORY AGREEMENT
ANNEX 1
1. REGULATORY STATUS
The Local Manager is authorized and regulated by the Financial Services
Authority (the "FSA"), the UK supervisory authority whose registered office
is at 25 The North Colonnade, Canary Xxxxx, Xxxxxx, Xxxxxx Xxxxxxx X00 0XX.
2. ORDER EXECUTION
The Local Manager acknowledges its duty under the FSA Rules to take all
reasonable steps to obtain the best possible result for VKAM (taking into
account the factors prescribed in the FSA Rules) when executing orders
resulting from decisions to deal in designated investments (as defined in
the FSA Rules) and to act in accordance with VKAM's best interests when
placing orders in respect of designated investments with other persons for
execution or when receiving and transmitting orders to other persons for
execution. Information concerning the Local Manager's policy for meeting
those obligations (the "Order Execution Policy Disclosure Statement") is
included as Schedule 1. VKAM acknowledges receipt of the Order Execution
Policy Disclosure Statement and confirms its consent to the matters
described in it. For the avoidance of doubt and as set out in the Order
Execution Policy Disclosure Statement, VKAM acknowledges that specific
instructions from VKAM in relation to the execution of orders may prevent
the Local Manager from following its execution policy in relation to such
orders in respect of the elements of execution covered by the instructions.
The Local Manager will act in good faith and with due diligence in its
choice and use of brokers or dealers ("Broker") to place client orders or
execute client transactions with. Subject thereto and to the FSA Rules, the
Local Manager may execute or arrange for the execution of transactions for
VKAM on such markets or exchanges (including markets or exchanges that are
not Regulated Markets or MTFs) and with or through such Brokers (but
excluding any Affiliate) as it thinks fit. All transactions will be
effected in accordance with the rules and regulations of the relevant
market or exchange, and the Local Manager may take all such steps as may be
required or permitted by such rules and regulations and/or by appropriate
market practice. For purposes of this Agreement, "Multilateral Trading
Facility" (also "MTF") has the meaning given in the FSA Rules (in summary,
an investment exchange or multilateral trading platform other than a
Regulated Market); and "Regulated Market" has the meaning given in the FSA
Rules (in summary, an investment exchange or multilateral trading platform
which, in either case, is regulated within the EEA as a "regulated market"
under the Markets in Financial Instruments Directive).
VKAM expressly instructs the Local Manager not to make public immediately
any limit order relating to transactions in respect of the Fund which is
not immediately executed
9
under prevailing market conditions where the Local Manager believes it is
in VKAM's interests not to do so.
The Local Manager may aggregate transactions for the Fund with transactions
of other clients of the Local Manager and of its employees and of clients
of its affiliate and its employees and will promptly allocate such
aggregated transactions among the participating accounts on a fair and
equitable basis in accordance its order allocation policy established in
compliance with the requirements of the FSA Rules. VKAM recognizes that the
Local Manager will aggregate transactions only where it reasonably believes
that it is likely that the aggregation will operate overall to the
advantage of the Fund. However, on occasion the aggregation may operate to
the disadvantage of the Fund in relation to a particular order. The Local
Manager will provide a copy of its order allocation policy to VKAM upon
request.
3. DEALING ARRANGEMENTS
The Local Manager's policy regarding its Dealing Arrangements, including
details of the goods and services that relate to the execution of trades
and those that relate to the provision of research are set out in Schedule
2. The Local Manager shall provide VKAM with details of its Dealing
Arrangements with the frequency required by the FSA Rules. For purposes of
this Agreement, "Dealing Arrangements" means arrangements entered into by
the Local Manager as permitted by the FSA Rules for the receipt or payment
of money, goods or services that relate to the execution of trades or the
provision of research under which the Local Manager executes or arranges
for the execution of orders in designated investments.
4. MATERIAL INTERESTS
The Local Manager and any of its affiliates (an "Affiliate") may, subject
to the overriding principles of suitability and best execution and without
prior reference to VKAM, effect transactions in which the Local Manager or
Affiliate has, directly or indirectly, a material interest or a
relationship of any description with another party, which may involve a
potential conflict with the Local Manager's duty to VKAM. Neither the Local
Manager nor any Affiliate shall be liable to account to VKAM for any
profit, commission or remuneration made or received from or by reason of
such transactions or any connected transactions nor will the Local
Manager's fees, unless otherwise provided, be abated. For example, such
potential conflicting interests or duties may arise because:
- any of the Local Manager's or Affiliate's directors or employees
is a director of, holds or deals in securities of, or is
otherwise interested in any company whose securities are held or
dealt in on behalf of VKAM;
- the transaction is in the securities of a company for which an
Affiliate has provided corporate finance advice, underwritten,
managed or arranged an issue or offer for sale;
- the Local Manager may act as agent for VKAM in relation to
transactions in which it is also acting as agent for the account
of other clients and/or an Affiliate;
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- the transaction is in units or shares of a collective investment
scheme (regulated or unregulated) of which the Local Manager or
any Affiliate is the manager, operator, banker, adviser,
custodian or trustee; or
- The Local Manager may act as agent for a counterparty and also
act as agent on behalf of VKAM and in the course of so acting may
charge a commission to either the counterparty or VKAM.
Nothing in the Agreement shall oblige the Local Manager or any Affiliate to
accept responsibilities more extensive than those set out in the Agreement
or shall give rise to any fiduciary or equitable duties which would prevent
or hinder either: (i) the Local Manager or any Affiliate performing
investment management or other services for any person or entity other than
VKAM or from making investments on their own behalf and the performance of
such services for others or investment on their own behalf will not be
deemed to violate or give rise to any duty or obligation to VKAM; or (ii)
the Local Manager effecting any transaction with or for VKAM with an
Affiliate; or (iii) such Affiliate acting both as market-maker and broker,
principal or agent, dealing with other Affiliates and other clients and
generally effecting transactions as provided above nor from retaining any
remuneration received in respect thereof.
5. RECORDS AND REPORTS
5.1 The Local Manager will keep accurate and detailed records with respect to
all receipts, investments, sales, disbursements and other transactions
carried out by the Local Manager for VKAM or with the Fund.
5.2 All records held pursuant to this clause by the Local Manager shall be open
to inspection by VKAM or the Fund and the Local Manager will provide VKAM
and the Fund with such access as it itself has to records held by any
relevant third party, in each case at reasonable times during business
hours and upon the giving of reasonable notice by VKAM or the Fund.
5.3 The Local Manager shall, not later than 10 working days following the end
of each calendar month, furnish to VKAM a statement showing all
transactions that have occurred in the Fund and a monthly listing of all
investments and cash balances held as of the end of such month.
5.4 The monthly statement will show the cost or amount realized (in the case of
any relevant new purchase or sale) and, where available, the current value
(where applicable) of each investment held in the Fund and any income
arising on the Fund's account during the relevant calendar month, and will
also include a statement showing the measure of the performance of the
assets of the Fund. The basis of all valuations will be as stated in the
first monthly statement, unless otherwise agreed.
5.5 The Local Manager will not provide VKAM with an individual trade
confirmation of each portfolio transaction unless VKAM has specifically
requested the Local Manager to do so.
6. FORCE MAJEURE
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The Local Manager shall not be responsible or liable to VKAM or the Fund
for any failure or delay in the performance of its obligations under this
Agreement arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control, including, without limitation,
acts of God; earthquakes; fires; floods; wars; civil or military
disturbances; sabotage; epidemics; riots; interruptions, loss or
malfunctions of utilities; computer (hardware or software) or
communications services; accidents; labor disputes; acts of civil or
military authority or governmental actions; it being understood that the
Local Manager shall use reasonable efforts which are consistent with
accepted practices in the investment management industry to resume
performance as soon as practicable under the circumstances.
7. COMPLAINTS
The Local Manager maintains procedures in accordance with FSA Rules for the
effective consideration and handling of client complaints. Complaints will
be considered promptly by the appropriate supervisory manager who is not
personally involved in the subject matter of the complaint. Where
appropriate, the complaint will be passed to the Compliance Officer.
8. RECORDING OF TELEPHONE INSTRUCTIONS
All instructions received from VKAM by telephone will be binding as if
received in writing. The Local Manager may record telephone conversations
with VKAM and produce such recordings in evidence if the Local Manager sees
fit to do so. In some circumstances, when VKAM is dealing with the Local
Manager, data may be collected about VKAM and VKAM's officers or employees
indirectly from monitoring devices or other means (for example, telephone
logs and recordings). In these circumstances, the data are not accessed on
a routine basis but access is possible. Access could occur, for instance,
in situations where the data are needed to clarify or confirm instructions
provided by VKAM, for compliance or billing purposes.
9. CONFIDENTIALITY AND DISCLOSURE
The Local Manager and VKAM undertake to keep private and confidential all
information acquired in connection with this Agreement, and not to disclose
such information to any person except to the extent that:
(a) the other party gives prior consent; or
(b) the Local Manager is required to disclose the information by the FSA,
the Bank of England, the London Stock Exchange or any other recognised
investment exchange, the City Panel on Takeovers and Mergers or any
other regulatory authority having jurisdiction over the Local Manager
or the performance by it of its obligations under this Agreement or by
English Law; or
(c) disclosure to a counterparty to a transaction effected for the Fund is
required as a condition to such transaction; or
(d) disclosure is necessary to enable the Local Manager to perform its
obligations
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under this Agreement.
10. DATA PROTECTION
10.1 The Local Manager will, in connection with the Sub-Advisory Agreement,
comply (where applicable) with the UK Data Protection Xxx 0000 and other
applicable data protection laws and regulations (together, the "Data
Protection Laws").
10.2 VKAM will comply (where applicable) with the Data Protection Laws and
(where applicable) take all reasonable steps to ensure that it has obtained
all necessary consents for the Local Manager to process any personal data
for the purposes of the Agreement.
11. RISK DISCLOSURE
11.1 VKAM's attention is drawn to Schedule 3 which provides important
information as to the nature and risks of certain investments which may
comprise the Fund and a description of certain provisions of the industry
standard master agreements and their consequences. VKAM represents and
warrants to the Local Manager that it has read, understood, and accepts the
provisions of Schedule 3.
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Schedule 1
ORDER EXECUTION POLICY DISCLOSURE STATEMENT
TRANSACTION EXECUTION ARRANGEMENTS
Xxxxxx Xxxxxxx Investment Management Limited ("MSIM") has established and
implemented transaction execution arrangements that are designed to allow MSIM
to take all reasonable steps to obtain the best possible result when executing
or placing orders as portfolio manager on behalf of its clients in relation to
financial instruments that form part, or may become part, of one or more
investment portfolios managed by MSIM for that or those clients (each a
"TRANSACTION"). For the purposes of this document: any reference to MSIM
"executing an order" is a reference to MSIM, as agent, entering into a
Transaction on behalf of a client with another person that acts as principal to
that Transaction, any reference to MSIM "placing an order" is a reference to
MSIM, as agent, arranging for a Transaction to be entered into by another person
that acts as agent on behalf of a client when entering into that Transaction,
and any reference to MSIM "effecting a Transaction" is a reference to MSIM
either placing or executing an order.
As part of its transaction execution arrangements, MSIM has an order execution
policy in place that is designed to ensure that MSIM complies with its duty to
obtain the best possible result when effecting a Transaction for one or more
clients (the "ORDER EXECUTION POLICY").
This document is intended to provide MSIM's clients with a summary of MSIM's
Order Execution Policy. Nothing herein is intended to place upon MSIM fiduciary
or other duties or responsibilities over and above the specific obligations
provided for in the investment management agreement between MSIM and a client.
THE QUALITY OF EXECUTION
Where MSIM effects a Transaction for its professional clients, subject to any
specific instructions received from a client, MSIM will determine the best
possible result taking the following factors into account: (a) price; (b) costs;
(c) speed; (d) likelihood of execution or settlement; (e) size of the
Transaction; (f) nature of the Transaction; and (g) any other consideration
relevant to the Transaction, including availability of liquidity, the impact on
the market of the Transaction and MSIM's operational costs.
Price is normally judged with reference to normal market size for the relevant
financial instrument. Where trades are outside of normal market size and in
sizeable volume or made on an over the counter basis, it is not generally
possible to source a quote for price from Brokers because a declaration of
intention to deal could result in market/security price sensitivity. As a
result, MSIM must then determine what is likely to be the best execution venue
without being able to get firm quotes, but there can be no guarantee that it
will be.
In certain circumstances, the relevant execution venue may not be able to
provide sufficient immediately available liquidity to carry the contemplated
Transaction out in full at the time required. In addition, other circumstances
may dictate that the best immediately available price for a Transaction may not
be the best possible result for that Transaction. Where, in MSIM's opinion,
those circumstances occur MSIM may need to split the Transaction up into
multiple Transactions with a view to obtaining the best possible result in
relation to the original Transaction by completing that Transaction over a
period of time using a variety of execution
14
venues.
MSIM will determine the relative importance of each factor using the following
criteria: (a) the characteristics of VKAM; (b) the characteristics and nature of
the Transaction, including whether any specific instructions are given by VKAM;
(c) the characteristics of the financial instruments that are the subject of the
Transaction; and (d) the characteristics of the execution venues to which the
Transaction can be directed.
While MSIM will take all reasonable steps, based on the resources available to
it, to satisfy itself that it has processes in place that can reasonably be
expected to lead to the delivery of the best possible result, MSIM does not
guarantee that it will always be able to obtain the best possible result in
relation to each Transaction.
SPECIFIC INSTRUCTIONS
Where a client provides MSIM with a specific instruction in relation to a
proposed Transaction or any particular aspect of that Transaction (including,
but not limited to, a direction to execute on a particular venue) MSIM will
effect that Transaction in accordance with those instructions. Specific
instructions may prevent MSIM from following some or all of the steps provided
for in the Order Execution Policy which are designed to obtain the best possible
result in respect of the elements covered by those instructions.
In following such instructions, MSIM will be deemed to have taken all reasonable
steps to provide the best possible result in respect of the relevant Transaction
or aspect of that Transaction covered by the specific instructions. To the
extent that specific instructions are not comprehensive, MSIM will determine any
non-specified components in accordance with its Order Execution Policy.
SELECTION OF EXECUTION VENUES
MSIM includes in its Order Execution Policy those execution venues (sources of
liquidity) that enable MSIM to obtain on a consistent basis the best possible
result in relation to the Transactions. MSIM may use one or more of the
following venues types: (a) Regulated Markets; (b) Multilateral Trading
Facilities; (c) Systematic Internalisers; (d) third party investment firms;
and/or (e) non-EU entities performing similar functions. In this document, the
terms "Regulated Market", "Multilateral Trading Facility" and "Systematic
Internaliser" have the meaning given to them in the Markets in Financial
Instruments Directive.
Certain Transactions may be effected outside a Regulated Market or a
Multilateral Trading Facility where MSIM believes it can achieve the best
possible result by doing so.
MSIM assesses product-by-product which venues are likely to provide the best
possible result, it also monitors the execution of all Transactions on that
venue if an order has been placed with another person and keeps informed of
relevant market information. For certain financial instruments, there may be
only one execution venue available and in such circumstances, MSIM will presume
that it has obtained the best possible result if it effects a Transaction in
that venue.
If a Transaction is effected by placing an order with another person for
execution, MSIM will either determine the ultimate execution venue itself and
instruct the other person accordingly, or MSIM will use all reasonable efforts
to satisfy itself that the other person has arrangements in place to enable MSIM
to comply with MSIM's obligation to obtain the best possible result in relation
to the relevant Transaction.
15
APPROVAL OF BROKERS, MONITORING AND REVIEW
MSIM's Order Execution Policy provides for a broker approval procedure. Apart
from a broker's commission/commission equivalent rates, MSIM will consider the
following matters when selecting and approving a broker: (a) reliability,
integrity and reputation in the industry; (b) execution capabilities, including
block positioning, speed of execution and quality and responsiveness of its
trading desk; (c) knowledge of, and access to, the markets for the securities
being traded; (d) ability to obtain price improvement; (e) ability to maintain
confidentiality; (f) ability to handle non-traditional trades; (g) technology
infrastructure; and (h) clearance and settlement capabilities.
In addition, in certain circumstances and in some markets, a broker's research
capabilities may be considered relevant factors in connection with the selection
and approval of a broker. This may include a broker's coverage of certain
industries in which MSIM may seek to invest on behalf of its clients, the
quality of the broker's research, as well as the reputation and standing of the
broker's analysts, their investment strategies, timing, accuracy of statistical
information and idea generation.
MSIM monitors the quality of the execution services provided by approved brokers
and reviews each broker's performance on a regular basis, taking the above
factors into account. MSIM meets with the most significant brokers periodically
to review the service and performance levels provided.
COMMISSION RATES
MSIM effects Transactions on the basis of standard commission rates for specific
markets. The rates are negotiated from time to time with each broker to ensure
competitiveness, taking into account market trends whilst seeking a commercial
balance so as to ensure the quality of services provided by the brokers.
16
Schedule 2
INFORMATION ABOUT MSIM'S USE OF DEALING COMMISSIONS AND
ACCEPTANCE OF NON-MONETARY BENEFITS FROM BROKERS
MSIM'S USE OF DEALING COMMISSIONS AND NON-MONETARY BENEFITS
Xxxxxx Xxxxxxx Investment Management Limited ("MSIM") will from time to time
execute or place orders with selected brokers as portfolio manager on behalf of
its professional clients in relation to financial instruments that form part, or
may become part, of one or more investment portfolios managed by MSIM for its
clients (each so executed or placed order a "TRANSACTION").
Although MSIM's investment decisions and the corresponding Transactions are
primarily based upon fundamental analysis and a variety of primary and secondary
information sources, external research and market intelligence from analysts
employed by the brokers MSIM may engage to effect Transactions is valuable in
helping to make informed investment decisions and in those circumstances, will
enhance the quality of the Fund management service provided by MSIM to its
clients. The available research covers sectors and markets in detail and may
generate and stimulate new ideas and discussions. Some research services will be
produced for all clients of the relevant broker, but the analysts may also
provide research that has been tailored to MSIM's specific request, including
the ability to discuss corporate developments in the immediate aftermath of
their announcement (together "RESEARCH SERVICES").
This document is intended to provide MSIM's professional clients with
information about the manner in which MSIM, when effecting Transactions, may
make payments on behalf of its client to certain providers of Research Services
and about certain non-monetary benefits that MSIM may receive from certain
brokers in the course of its dealings with such brokers.
THE CONDITIONS UPON WHICH DEALING COMMISSIONS WILL BE PAID TO PROVIDERS OF
RESEARCH SERVICES
MSIM will only make payments to a broker in consideration of the provision of
Research Services when it is satisfied using its reasonable judgement that the
Research Services received in return for the payments will reasonably assist
MSIM in the provision of its portfolio management services to VKAMs on whose
behalf the relevant Transactions are being effected and do not, and are not
likely to, impair compliance with the duty of MSIM to act in the best interests
of its clients (including, without limitation, its obligation to take all
reasonable steps to obtain the best possible result when effecting a
Transaction).
THE MANNER IN WHICH DEALING COMMISSIONS ARE PAID TO PROVIDERS OF RESEARCH
SERVICES
If the conditions for payment have been satisfied, the eligible providers of
Research Services may be remunerated for the provision of Research Services as
part of MSIM's commission sharing arrangements. Under the commission sharing
arrangements, MSIM will instruct participating brokers to record a certain
portion of dealing commission that is received pursuant to the completion of a
Transaction, based upon a previously agreed allocation, as research credits
(each a "POOL"). Each of the participating brokers has undertaken to MSIM,
periodically, subject to an instruction from MSIM, to make payments from their
Pool to providers of Research Services (including the administering broker
itself) as MSIM may specify in the instruction(s). Any balance that may remain
after allocation instructions have been carried out will be carried forward to
the next period.
MSIM allocates the Pools based on a periodic assessment of the quality of the
Research Services provided to MSIM by the participating brokers during that
period. MSIM tends to consider,
17
without limitation, the quality of the analyst service, the sales service, and
the company meetings that have been arranged with senior management of companies
in which MSIM invests for its clients. Decisions are being taken based on a
voting system in which MSIM equity portfolio managers participate. As part of a
relationship management effort, MSIM will meet periodically with those providers
of Research Services that MSIM deems most significant.
THE CONDITIONS UPON WHICH MSIM EMPLOYEES MAY ACCEPT NON-MONETARY BENEFITS FROM
BROKERS
MSIM's employees that interact with brokers may from time to time receive
certain non-monetary benefits in the form of gifts. MSIM has detailed compliance
procedures relating to the standard of conduct expected from employees in these
circumstances which are designed to achieve that receipt of such gifts does not,
and is not likely to, impair compliance with the duty of MSIM and its employees
to act in the best interests of its clients. Most gifts are received during the
holiday season and depending on the number received gifts are either put into a
raffle or allocated between employees. Employees are allowed to accept
invitations to attend sporting, artistic or entertainment events from suppliers
and counterparties in accordance with guidelines and limits that are detailed in
the policy.
18
Schedule 3
INFORMATION ON THE NATURE AND RISKS OF CERTAIN INVESTMENTS
The information contained in this notice cannot disclose everything about the
nature and risks of all financial instruments in the Fund. Rather it is a
general description of the nature and risks of financial instruments, which
explains the nature of the specific types of instruments which VKAM may include
in the Fund's investment guidelines (the "INVESTMENT GUIDELINES"), as well as
the risks particular to those instruments. VKAM should not include these
financial instruments in the Investment Guidelines unless VKAM understand the
nature of the financial instruments VKAM is permitting Xxxxxx Xxxxxxx Investment
Management Limited ("MSIM") to enter into on VKAM's behalf and the extent of
VKAM's exposure to risk. VKAM should also be satisfied that such financial
instruments are suitable for the Fund in light of VKAM's circumstances and
financial position. Certain strategies, such as a spread position or "straddle",
may be as risky as a simple "long" or "short" position. While financial
instruments can be utilised for the management of investment risk, certain
financial instruments are unsuitable for certain investors. Different financial
instruments involve different levels of exposure to risk, and in deciding
whether to include such instruments in the Investment Guidelines, VKAM should be
aware of the following points.
1. GENERAL
1.1 RETURNS
The value of investments and the income from them may fluctuate and go down as
well as up. There is no guarantee that the investment objective will actually be
achieved or that VKAM will get back the amount initially invested. The value of
investments may be affected by a variety of factors, including economic and
political developments, interest rates and foreign exchange rates, as well as
issuer-specific events.
1.2 CURRENCY RISK
Investments denominated in currencies other than VKAM's base currency carry the
risk of exchange-rate movements. A movement in exchange rates may have a
separate effect, unfavourable as well as favourable, on gains and losses in the
Fund. Hedging techniques may, in certain circumstances, be limited or not be
successful.
1.3 INVESTMENTS WHICH ARE NOT READILY REALISABLE
The market for some investments may be restricted or illiquid. Subject to the
Investment Guidelines, MSIM may effect transactions in such investments for the
Fund. There may be no readily available market and from time to time there may
be difficulty in dealing in such investments or obtaining reliable information
about the value and extent of risks associated with such investments.
2. EQUITY SECURITIES AND DEBT SECURITIES
Buying equity securities (the most common form of which are shares) will
mean that VKAM will become a member of the issuer company and participate fully
in its economic risk. Holding equity securities will generally entitle VKAM to
receive any dividend distributed each year (if any) out of the issuer's profits
made during the reference period.
On the other hand, buying debt securities (such as bonds and certificates
of deposit) will mean that VKAM is, in effect, a lender to the company or entity
that has issued the securities. Holding debt securities will entitle VKAM to
receive specified periodic interest payments, as well as repayment of the
principal at maturity.
Generally, holdings in equity securities will expose VKAM to more risk than
debt securities since remuneration is tied more closely to the profitability of
the issuer. In the event of insolvency of the issuer, VKAM's
19
claims for recovery of VKAM's equity investment in the issuer will generally be
subordinated to the claims of both preferred or secured creditors and ordinary
unsecured creditors of the issuer.
There is an extra risk of losing money when shares are bought in some
smaller companies, such as xxxxx shares. There is a usually big difference
between the buying price and the selling price of these shares. If they have to
be sold immediately, VKAM may get back much less than was paid for them. The
price may change quickly and it may go down as well as up.
Holdings in debt securities, on the other hand, generally risk not being
remunerated only if the issuer is in a state of financial distress. Moreover, in
the event of insolvency of the issuer, VKAM is likely to be able to participate
with other creditors in the allotment of the proceeds from the sale of the
company's assets in priority to holders of equity securities.
If the Investment Guidelines allow MSIM to buy equity or debt securities
VKAM will be exposed to both the specific risks associated with individual
securities held (and the financial soundness of their issuers), as well as the
systemic risks of the equity and debt securities markets.
3. DERIVATIVES
3.1 FUTURES
Transactions in futures involve the obligation to make, or to take,
delivery of the underlying asset of the contract at a future date, or in some
cases to settle VKAM's position with cash from the Fund or elsewhere.
Transactions in futures carry a high degree of risk. The "gearing" or "leverage"
often obtainable in futures trading means that a small deposit or down payment
can lead to large losses as well as gains. It also means that a relatively small
market movement can lead to a proportionately much larger movement in the value
of VKAM's investment, and this can work against VKAM as well as for VKAM.
Futures transactions have a contingent liability, and VKAM should be aware of
the implications of this, in particular the margining requirements, which are
described in paragraph 7.2 below.
3.2 OPTIONS
There are many different types of options with different characteristics
subject to different conditions:
3.2.1 BUYING OPTIONS:
Allowing MSIM to buy options involves less risk than allowing MSIM to sell
options because, if the price of the underlying asset moves against VKAM, MSIM
can simply allow the option to lapse. The maximum loss is limited to the
premium, plus any commission or other transaction charges. However, if MSIM buys
a call option on a futures contract for VKAM and later exercises the option,
VKAM will acquire the future. This will expose VKAM to the risks described under
"futures" and "contingent liability transactions".
3.2.2 WRITING OPTIONS:
If the Investment Guidelines allow MSIM to write an option for VKAM, the
risk involved is considerably greater than buying options. VKAM may be liable
for margin to maintain its position and a loss may be sustained well in excess
of any premium received. By allowing MSIM to write an option on VKAM's behalf,
VKAM accepts a legal obligation to purchase or sell the underlying asset if the
option is exercised against VKAM, however far the
20
market price has moved away from the exercise price. If VKAM already owns the
underlying asset which MSIM has contracted on VKAM's behalf to sell as part of
the Fund (known as "covered call options") the risk is reduced. If VKAM does not
own the underlying asset (known as "uncovered call options") the risk can be
unlimited. Only experienced persons should contemplate authorizing MSIM to write
uncovered options, and then only after securing full details of the applicable
conditions and potential risk exposure.
3.2.3 TRADITIONAL OPTIONS:
A particular type of option (called a "traditional option") is written by
certain London Stock Exchange firms under special exchange rules. These may
involve greater risk than other options. Two way prices are not usually quoted
and there is no exchange market on which to close out an open position. It may
be difficult to assess the value of a traditional option or for the seller of
such an option to manage his exposure to risk. Again, VKAM should only provide
for the Investment Guidelines to permit MSIM to invest in "traditional options"
if VKAM is fully aware of the risks involved.
3.2.4 MARGIN:
Certain options markets operate on a margined basis, under which buyers do
not pay the full premium on their option at the time they purchase it. In this
situation the Fund (or VKAM if there are insufficient assets in the Fund) may
subsequently be called upon to pay margin on the option up to the level of
VKAM's premium. If VKAM fails to do so as required, VKAM's position may be
closed or liquidated in the same way as a futures position.
3.3 CONTRACTS FOR DIFFERENCES:
A contract for difference is a contract between two parties, buyer and
seller, stipulating that the seller will pay to the buyer the difference between
the current value of an asset and its value at contract time. Contracts for
differences allow investors to take long or short positions, and unlike futures
contracts have no fixed expiry date or contract size. Trades are conducted on a
leveraged basis and these contracts can only be settled in cash. Investing in a
contract for differences carries the same risks as investing in a future or
option and VKAM should be aware of these as set out in paragraphs 3.1 and 3.2
respectively. Transactions in contracts for differences may also have a
contingent liability and VKAM should be aware of the implications of this as set
out in paragraph 7.2 below. As with many leveraged products, maximum exposure is
not limited to the initial investment; it is possible to lose more than one put
in.
3.4 OFF-EXCHANGE TRANSACTIONS IN DERIVATIVES:
It may not always be apparent whether or not a particular derivative is on
or off-exchange.
While some off-exchange markets are highly liquid, transactions in
off-exchange or non transferable derivatives may involve greater risk than
investing in on-exchange derivatives because there is no exchange market on
which to close out an open position. It may be impossible to liquidate an
existing position, to assess the value of the position arising from an
off-exchange transaction or to assess the exposure to risk. Bid and offer prices
need not be quoted, and even where they are, they will be established by dealers
in these instruments and consequently it may be difficult to establish what a
fair price is. VKAM should only permit MSIM in the Investment Guidelines to
invest the Fund in off-exchange derivatives transactions if VKAM is fully aware
of the risks involved.
21
3.5 ISDA MASTER AGREEMENT
Where VKAM permits MSIM under the Investment Guidelines to enter into
derivative transactions, these may be of the type that may be governed by the
ISDA Master Agreement. The ISDA Master Agreement is a standard agreement
commonly used in the derivatives market which sets forth key provisions
governing the contractual relationship between the parties to such agreement,
including each of their rights, liabilities and obligations. If MSIM enters into
derivative transactions on VKAM's behalf, MSIM may also enter into a Credit
Support Annex. The Credit Support Annex is an annex to the ISDA Master Agreement
and is used to document bilateral credit support arrangements between parties
for transactions governed by an ISDA Master Agreement.
On each date on which a derivatives transaction is entered into, VKAM will
be deemed to have given various representations and undertakings to each
counterparty with whom MSIM enters into an ISDA Master Agreement on VKAM's
behalf.
In certain circumstances, VKAM may be required to pay an additional amount
or receive a payment from which an amount is required to be deducted or
withheld, in each case in respect of any deduction or withholding for on account
of any tax, or be required to pay any stamp tax levied or imposed in respect of
the execution or performance of the ISDA Master Agreement.
Markets and exchanges require that anyone trading in derivatives must
advance collateral as security for initial and variation margin requirements.
MSIM has been authorized to instruct the VKAM's custodian to advance cash or
other collateral acceptable to the counterparty or broker to an account
designated by the counterparty or broker to meet margin payments as required by
the rules and regulations of any market or exchange on which derivatives are
dealt by MSIM as the VKAM's agent. If, under the rules and regulations of any
exchange or market, adverse price movements occur and margin calls are made and
insufficient funds are available in the Portfolio to meet such margin calls,
MSIM may request that the VKAM make additional funds immediately available until
assets can be realized to cover the related margin call. If the VKAM fails to
makes such funds available, the VKAM's positions may be closed out and
liquidated, resulting in a loss to the Portfolio for which MSIM shall not be
liable.
4. WARRANTS
If the Investment Guidelines so permit, MSIM may effect transactions in
warrants for the Fund.
4.1 WARRANTS:
A warrant is a time-limited right to subscribe for shares, debentures, loan
stock or government securities, and is exercisable against the original issuer
of the securities. Warrants often involve a high degree of gearing, so that a
relatively small movement in the price of the underlying security results in a
disproportionately large movement, favorable or unfavorable in the price of the
warrant. The prices of warrants can therefore be volatile. VKAM should not
include warrants in the Investment Guidelines unless VKAM is prepared for the
Fund to sustain a total loss of the money VKAM has invested plus any commission
or other transaction charges. Some other instruments are also called warrants
but are actually options (for example, a right to acquire securities which is
exercisable against someone other than the original issuer of the securities,
often called a "covered warrant").
If VKAM is considering including warrants in the Investment Guidelines, it
is essential to understand that the right to subscribe which a warrant confers
is invariably limited in time. Therefore, if VKAM fails to exercise this right
within the pre-determined time scale, the investment becomes worthless.
22
4.2 OFF-EXCHANGE TRANSACTIONS:
Transactions in off-exchange warrants may involve greater risk than dealing
in exchange traded warrants because there is no exchange market through which to
liquidate VKAM's position or to assess the value of the warrant or the exposure
to risk. Bid and offer prices need not be quoted, and even where they are, they
will be established by dealers in these instruments and consequently it may be
difficult to establish what a fair price is. VKAM should only permit MSIM in the
Investment Guidelines to invest the Fund in off-exchange warrants if VKAM is
fully aware of the risks involved.
5. COLLECTIVE INVESTMENT SCHEMES
Collective investment schemes (such as investment funds and open-ended
investment companies) invest funds paid by purchasers of units or shares in the
collective investment scheme in the various types of asset provided for in their
rules or investment plans. As such, collective investment schemes generally
allow unit holders and shareholders to achieve a high degree of diversification
at a relatively low cost. Open-ended investment funds, for example, allow savers
to invest or disinvest by buying or selling fund units on the basis of the value
of a unit, plus or minus relevant commissions (the value of the unit being
obtained by dividing the value of the entire portfolio managed by the Fund,
calculated at market prices, by the number of units in circulation).
Allowing MSIM to purchase units or shares in a collective investment scheme
will expose VKAM to the risks associated with the nature of the financial
instruments in which the collective investment scheme invests and, where
relevant, their concentration in a particular sector, country, region or asset
class. Before allowing MSIM to invest in collective investment schemes, VKAM
should make itself fully aware of the risks associated with collective
investment schemes, including without limitation, the general risks identified
in paragraph 1 above.
6. EXCHANGE TRADED FUNDS
Exchange traded funds ("ETFS") are closed-ended collective investment
schemes, traded as shares on stock exchanges, and typically replicate a stock
market index, market sector, commodity or basket of assets. As such, they
generally combine the flexibility and tradeability of a share with the
diversification of a collective investment scheme. Where the Investment
Guidelines permit MSIM to purchase ETFs, VKAM will be exposed to similar risks
as detailed in respect of equity securities and collective investment schemes,
as well as the general risks detailed in paragraph 1.
7. MISCELLANEOUS
7.1 OVERSEAS MARKETS:
Overseas markets may involve different risks to VKAM's home markets. In
some cases the risks will be greater. In drafting the Investment Guidelines to
permit MSIM to invest in overseas markets VKAM should make itself fully aware of
the risks and protections (if any) which will operate in any relevant overseas
markets. The potential for profit or loss from transactions on overseas markets
or in contracts denominated other than in the Fund's base currency will be
affected by fluctuations in overseas exchange rates against the Fund's base
currency.
7.2 CONTINGENT LIABILITY INVESTMENTS:
Contingent liability investments are derivatives under the terms of which
the Client will or may be liable to make further payments (other than charges,
and whether or not secured by margin) when the transaction falls to be completed
or upon the earlier closing out of VKAM's position. Contingent liability
investments which are margined require the Fund (or VKAM if there are
insufficient assets in the Fund) to make a series of payments against the
purchase price, instead of paying the whole purchase price immediately.
If VKAM permits MSIM, as part of the Investment Guidelines, to trade for
the Fund in futures, contracts for differences or write or otherwise deal on
margin in options for the Fund, VKAM may sustain a total loss of the margin
which MSIM, on VKAM's behalf, deposits with a broker to establish or maintain a
position. If the market moves against VKAM, VKAM may be called upon to pay out
of the Fund (or VKAM's other assets if there are
23
insufficient assets in the Fund) substantial additional margin at short notice
to maintain the position. If VKAM fails to do so within the time required,
VKAM's position may be liquidated at a loss and VKAM will be liable for any
resulting deficit.
Even if a transaction is not margined, it may still carry an obligation to
make further payments in certain circumstances over and above any amount paid
when the contract was entered into. Contingent liability investments which are
not traded on or under the rules of a regulated market may expose VKAM and the
Fund to substantially greater risks.
7.3 COLLATERAL:
If VKAM permits MSIM as part of the Investment Guidelines to enter into
transactions which require VKAM to deposit collateral as security with a broker,
the way in which such collateral will be treated will vary according to the type
of transaction and where it is traded. There could be significant differences in
the treatment of VKAM's collateral depending on whether the trading is on a
regulated market, with the rules of that market (and associated clearing house)
applying, or is off-exchange. Deposited collateral may lose its identity as
VKAM's property once dealings on VKAM's behalf are undertaken. Even if VKAM's
dealings should ultimately prove profitable, VKAM may not get back the same
assets which MSIM deposited on VKAM's behalf and may have to accept payment in
cash.
7.4 COMMISSIONS:
VKAM is liable for all commissions and it may be the case that charges are
not expressed in money terms (but for example, as a percentage of contract
value). In the case of futures, when commission is charged as a percentage, it
will normally be as a percentage of the total contract value, and not simply as
a percentage of VKAM's initial payment.
7.5 SUSPENSIONS OF TRADING:
Under certain trading conditions or the application of certain rules in
force in some markets (such as circuit breakers) it may be difficult or
impossible for MSIM to liquidate a position held for VKAM. This may occur, for
example, at times of rapid price movement if the price of an investment rises or
falls in one trading session to such an extent that under the rules of the
relevant exchange trading of that investment is suspended or restricted.
Further, MSIM placing a stop-loss order on VKAM's behalf will not necessarily
limit losses to the intended amounts because market conditions may make it
impossible to execute such an order at the stipulated price. Most electronic and
auction trading systems are supported by computerized systems for order routing
and trade checking, recording and clearing. Like all automated procedures, these
systems are subject to the risk of stoppages and malfunctions, which may result
in VKAM's orders not being executed in accordance with MSIM's instructions or
remaining unexecuted.
7.6 CLEARING HOUSE PROTECTIONS:
On many exchanges, the performance of a transaction by a broker (or the
third party with whom he is dealing on VKAM's behalf) is "guaranteed" by the
exchange or its clearing house. However, this guarantee is unlikely in most
circumstances to cover VKAM and may not protect VKAM if the broker or another
party defaults on its obligations to VKAM. There is no clearing house for
traditional options, nor normally for instruments which are not traded under the
rules of a recognized or designated investment exchange.
7.7 INSOLVENCY:
A derivative broker's insolvency or default, or that of any other brokers
involved with VKAM's transaction, may lead to positions being liquidated or
closed out without VKAM's or MSIM's consent or knowledge. In certain
circumstances, VKAM may not get back the actual assets which VKAM lodged as
collateral and VKAM may have to accept any available payment in cash.
24
