EXHIBIT (d)(ii)(3)
UNDISCOVERED MANAGERS FUNDS
SUB-ADVISORY AGREEMENT
(UNDISCOVERED MANAGERS SPECIAL SMALL CAP FUND)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
August 1, 2001 by and between Undiscovered Managers, LLC, a Delaware limited
liability company (the "Manager"), and Kestrel Investment Management
Corporation, a California corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into a Management Agreement dated
August 1, 2001 (the "Management Agreement") with Undiscovered Managers Funds
(the "Trust"), pursuant to which the Manager provides portfolio management and
administrative services to the Special Small Cap Fund of the Trust (the
"Series");
WHEREAS, the Management Agreement provides that the Manager may
delegate any or all of its portfolio management responsibilities under the
Management Agreement to one or more sub-advisers; and
WHEREAS, the Manager desires to retain the Sub-Adviser to render
portfolio management services in the manner and on the terms set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the
Manager and in cooperation with any administrator appointed by the Manager (the
"Administrator"), manage the investment and reinvestment of the assets of the
Series. The Sub-Adviser shall manage the Series in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the Series, without regard to the length
of time the securities have been held and the resulting rate of portfolio
turnover or any tax considerations; and the majority or the whole of the Series
may be invested in such proportions of stocks, bonds, other
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securities or investment instruments, or cash, as the Sub-Adviser shall
determine. Notwithstanding the foregoing provisions of this Section 1.a,
however, the Sub-Adviser shall, upon written instructions from the Manager,
effect such portfolio transactions for the Series as the Manager shall determine
are necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the
Administrator monthly, quarterly and annual reports concerning portfolio
transactions and performance of the Series in such form as may be mutually
agreed upon, and agrees to review the Series and discuss the management of the
Series with representatives or agents of the Manager, the Administrator or the
Trust at their reasonable request. The Sub-Adviser shall permit all books and
records with respect to the Series to be inspected and audited by the Manager
and the Administrator at all reasonable times during normal business hours, upon
reasonable notice. The Sub-Adviser shall also provide the Manager, the
Administrator or the Trust with such other information and reports as may
reasonably be requested by the Manager, the Administrator or the Trust from time
to time, including without limitation all material as reasonably may be
requested by the trustees of the Trust pursuant to Section 15(c) of the 1940
Act.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
as amended from time to time and a list of the persons whom the Sub-Adviser
wishes to have authorized to give written and/or oral instructions to custodians
of assets of the Series.
d. The Sub-Adviser shall maintain and be bound by a Code of
Ethics satisfying the requirements of Rule 17j-1 under the 1940 Act, and shall
provide to the Trust a current copy of such Code of Ethics, as amended from time
to time.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Trust's custodian
to provide) timely information to the Sub-Adviser regarding such matters as the
composition of assets in the Series, cash requirements and cash available for
investment in the Series, and all other information as may be reasonably
necessary for the Sub-Adviser to perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
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3. Custodian. The Manager shall provide the Sub-Adviser with a copy of the
Series' agreement with the custodian designated to hold the assets of the Series
(the "Custodian") and any modifications thereto (the "Custody Agreement"),
copies of such modifications to be provided to the Sub-Adviser a reasonable time
in advance of the effectiveness of such modifications. The assets of the Series
shall be maintained in the custody of the Custodian identified in, and in
accordance with the terms and conditions of, the Custody Agreement (or any
sub-custodian properly appointed as provided in the Custody Agreement). The
Sub-Adviser shall have no liability for the acts or omissions of the Custodian,
unless such act or omission is required by and taken in reliance upon
instructions given to the Custodian by a representative of the Sub-Adviser
properly authorized to give such instructions under the Custody Agreement. Any
assets added to the Series shall be delivered directly to the Custodian.
4. Expenses. Except for expenses specifically assumed or agreed to be paid by
the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for any
expenses of the Manager or the Trust including, without limitation, (a) interest
and taxes, (b) brokerage commissions and other costs in connection with the
purchase or sale of securities or other investment instruments with respect to
the Series, and (c) custodian fees and expenses. The Sub-Adviser will pay its
own expenses incurred in furnishing the services to be provided by it pursuant
to this Agreement.
5. Purchase and Sale of Assets. Absent instructions from the Manager to the
contrary, the Sub-Adviser shall place all orders for the purchase and sale of
securities for the Series with brokers or dealers selected by the Sub-Adviser,
which may include brokers or dealers affiliated with the Sub-Adviser, provided
such orders comply with Rule 17e-1 under the 1940 Act in all respects. To the
extent consistent with applicable law, purchase or sell orders for the Series
may be aggregated with contemporaneous purchase or sell orders of other clients
of the Sub-Adviser. The Sub-Adviser shall use its best efforts to obtain
execution of transactions for the Series at prices which are advantageous to the
Series and at commission rates that are reasonable in relation to the benefits
received. However, the Sub-Adviser may select brokers or dealers on the basis
that they provide brokerage, research or other services or products to the
Series and/or other accounts serviced by the Sub-Adviser. To the extent
consistent with applicable law, the Sub-Adviser may pay a broker or dealer an
amount of commission for effecting a securities transaction in excess of the
amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination with respect to brokerage and research services or
products may be viewed in terms of either that particular transaction or the
overall responsibilities that the Sub-Adviser and its affiliates have with
respect to the Series or to accounts over which they exercise investment
discretion. Not all such services or products need be used by the Sub-Adviser in
managing the Series.
6. Compensation of the Sub-Adviser. As full compensation for all services
rendered, facilities furnished and expenses borne by the Sub-Adviser hereunder,
the Manager shall pay the Sub-Adviser compensation, within thirty days after the
end of each calendar quarter, at the Performance Fee Rate. As used in this
Agreement, "Performance Fee Rate" shall mean, with respect to each calendar
quarter, the annual percentage rate of the average daily net assets of the
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Series during such quarter that is determined by adding to (or subtracting from)
0.80% one-fifth of the number of basis points by which the total return of the
Series (expressed as a percentage, and calculated before giving effect to the
Series's expenses) during the one-year period ending at the end of such quarter
exceeds (or falls short of) the Benchmark (as hereinafter defined), provided,
however, that such fee rate shall in no event exceed the annual rate of 1.30% of
such average daily net assets and shall in no event be less than 0.30% of such
average daily net assets. As used in this Agreement, "Benchmark" shall mean,
with respect to the calculation of the Performance Fee Rate following the end of
each calendar quarter, the total return (on a dividends-reinvested basis, and
expressed as a percentage) of the Xxxxxxx 2000 Index during the one-year period
ending at the end of such quarter. The Manager may from time to time waive the
compensation it is entitled to receive from the Trust; however, any such waiver
will have no effect on the Manager's obligation to pay the Sub-Adviser the
compensation provided for herein.
7. Non-Exclusivity. The Manager and the Series agree that the services of the
Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and its
affiliates are free to act as investment manager and provide other services to
various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager may otherwise agree from time to time in writing
before or after the date hereof. This Agreement shall not in any way limit or
restrict the Sub-Adviser or any of its directors, officers, employees or agents
from buying, selling or trading any securities or other investment instruments
for its or their own account or for the account of others for whom it or they
may be acting, provided that such activities do not adversely affect or
otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Trust or the Manager in any way or
otherwise be deemed an agent of the Trust or the Manager.
8. Liability. Except as may otherwise be provided by the 1940 Act or other
federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties.
9. Effective Date and Termination. This Agreement shall become effective as of
the date of its execution, and
a. unless otherwise terminated, this Agreement shall continue
in effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically approved at least
annually (i) by the Board of Trustees of the Trust or
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by vote of a majority of the outstanding voting securities of the Series, and
(ii) by vote of a majority of the trustees of the Trust who are not interested
persons of the Trust, the Manager or the Sub-Adviser, cast in person at a
meeting called for the purpose of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser by the Manager, by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series;
c. this Agreement may be terminated by the Sub-Adviser at any
time on or before December 31, 2004, on one hundred eighty days' written notice
to both the Manager and the Trust, provided that the Manager consents in writing
to such termination;
d. this Agreement may be terminated by the Sub-Adviser on one
hundred eighty days' written notice to both the Manager and the Trust, at any
time after December 31, 2004; and
e. this Agreement shall automatically terminate in the event
of its assignment.
Termination of this Agreement pursuant to this Section 9 shall be
without the payment of any penalty.
10. Amendment. This Agreement may be amended at any time by mutual consent of
the Manager and the Sub-Adviser, provided that, if required by law, such
amendment shall also have been approved by vote of a majority of the outstanding
voting securities of the Series and by vote of a majority of the trustees of the
Trust who are not interested persons of the Trust, the Manager or the
Sub-Adviser, cast in person at a meeting called for the purpose of voting on
such approval.
11. Certain Definitions. For the purpose of this Agreement, the terms "vote of a
majority of the outstanding voting securities," "interested person," "affiliated
person" and "assignment" shall have their respective meanings defined in the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under the 1940 Act.
12. General.
a. If any term or provision of this Agreement or the
application thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to other persons or circumstances shall not be affected
thereby and shall be enforced to the fullest extent permitted by law.
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b. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
UNDISCOVERED MANAGERS, LLC
By: /s/ Xxxx X. Xxxxxx
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Xxxx X. Xxxxxx
Chairman and CEO
KESTREL INVESTMENT MANAGEMENT
CORPORATION
By: /s/ Xxxxx X. Xxxxxxxx
----------------------
Xxxxx X. Xxxxxxxx
President
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