DRAFT: 3-27-03
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this __th day of ___________, 2003, between
VANGUARD SPECIALIZED FUNDS, a Delaware statutory trust (the "Trust"), and
WELLINGTON MANAGEMENT COMPANY, LLP, a Massachusetts partnership (the "Adviser").
W I T N E S S E T H
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust offers a series of shares known as Vanguard Dividend
Growth Fund (the "Fund"); and
WHEREAS, the Trust desires to retain the Adviser to render investment
advisory services to the Fund, and the Adviser is willing to render such
services.
NOW THEREFORE, in consideration of the mutual promises and undertakings set
forth in this Agreement, the Trust and the Adviser hereby agree as follows:
1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser as
investment adviser, on the terms and conditions set forth herein,
for the portion of the assets of the Fund that the Trust's Board
of Trustees (the "Board of Trustees") determines in its sole
discretion to assign to the Adviser from time to time (referred
to in this Agreement as the "Wellington Management Portfolio").
As of the date of this Agreement, the Wellington Management
Portfolio will consist of all of the assets of the Fund. The
Board of Trustees may, from time to time, make additions to, and
withdrawals from, the assets of the Fund assigned to the Adviser.
The 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 the Adviser to manage the
investment and reinvestment of the assets of the Wellington
Management Portfolio; to continuously review, supervise, and
administer an investment program for the Wellington Management
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 the 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. The Adviser will discharge the foregoing
responsibilities subject to the supervision and oversight of the
Fund's officers and the Board of Trustees, and in compliance with
the objectives, policies and limitations set forth in the Fund's
prospectus and Statement of Additional Information, any
additional operating policies or procedures that the Fund
communicates to the Adviser in writing, and applicable laws and
regulations. The 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. The Adviser is authorized to select the
brokers or dealers that will execute purchases and sales of
securities for the Wellington Management Portfolio, and is
directed to use its best efforts to obtain the best available
price and most favorable execution for such transactions. To the
extent expressly permitted by the written policies and procedures
established by the Board of Trustees, and subject to Section
28(e) of the Securities Exchange Act of 1934, as amended, any
interpretations thereof by the Securities and Exchange Commission
or its staff, and other applicable law, the Adviser is permitted
to pay a broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that
transaction if the Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or
the Adviser's overall responsibilities to the accounts as to
which it exercises investment discretion. The execution of such
transactions in conformity with the authority expressly
referenced in the immediately preceding sentence shall not be
deemed to represent an unlawful act or breach of any duty created
by this Agreement or otherwise. Subject to the first sentence of
this Section 3, the Adviser agrees to comply with any reasonable
directed brokerage or other brokerage policies and procedures
that the Fund communicates to the Adviser in writing. The Adviser
will promptly communicate to the Fund's officers and the Board of
Trustees any information relating to the portfolio transactions
the Adviser has directed on behalf of the Wellington Management
Portfolio as such officers or the Board may reasonably request.
4. COMPENSATION OF ADVISER. For the services to be rendered by the
Adviser as provided in this Agreement, the Fund will pay to the
Adviser at the end of each of the Fund's fiscal quarters an
amount (the "Adjusted Fee") equal to a basic fee ("Basic Fee")
plus a performance adjustment amount ("Adjustment Amount"). For
purposes of the calculations, both the Basic Fee and the
Adjustment Amount will incorporate an asset-based fee ("Asset
Fee") that is determined by applying a quarterly rate, calculated
based on the following annual percentage rate schedule, to the
average month-end net assets of the Wellington Management
Portfolio over the applicable time period:
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Annual Percentage Rate Schedule
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Annual Percentage Average Month-End
Rate Net Assets
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0.125% On the first $1 billion
0.100% On the next $4 billion
0.080% Over $5 billion
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The Basic Fee is equal to the Asset Fee as computed over the fiscal quarter for
which the Adjusted Fee is being calculated ("Relevant Fiscal Quarter").
Subject to the transition rules described below, the Adjustment Amount is
equal to the product of an adjustment percentage ("Adjustment Percentage") and
the Asset Fee as computed over the 36-month period ending with the Relevant
Fiscal Quarter ("Relevant 36-Month Period"). The Adjustment Percentage will vary
based on the investment performance of the Wellington Management Portfolio
relative to the investment performance of the Xxxxxxx 1000 Index (the "Index")
as determined for the Relevant 36-Month Period. The Adjustment Percentage
applies as follows:
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Cumulative Performance of
Wellington Management Portfolio vs. Index Adjustment Percentage1
Over Relevant 36-Month Period
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Less than -6% -0.50 x Basic Fee
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From -6% up to and including -3% -0.25 x Basic Fee
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Between -3% and +3% 0.00 x Basic Fee
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From +3 up to and including +6% +0.25 x Basic Fee
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More than +6% +0.50 x Basic Fee
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4.1. TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Adjustment
will not be fully operable until the close of the quarter ending July 31, 2006.
Until that date, the following transition rules will apply:
(a) MAY 31, 2003 THROUGH JANUARY 31, 2004. Adviser's compensation will be the
Basic Fee. No Adjustment will apply during this period.
(b) FEBRUARY 1, 2004 THROUGH JULY 31, 2006. Beginning February 1, 2004, the
Adjustment will take effect on a progressive basis with regards to the
number of months elapsed between May 31, 2003, and the end of the quarter
for which Adviser's fee is being computed. During the period, the
Adjustment will be calculated using cumulative performance of the
Wellington Management Portfolio and the Index from May 31, 2003,through the
end of the applicable quarter. For these purposes, the endpoints and size
of the range over which a positive or negative Adjustment applies and the
corresponding Adjustment amount will be multiplied by a fractional
time-elapsed adjustment. The fraction will equal the number of months
elapsed since May 31, 2003, divided by thirty-six. Example: Assume that the
Adviser's compensation is being calculated for the quarter ended July 31,
2005, and that the cumulative performance of the Wellington Management
Portfolio versus the Index for the applicable period is +5.0%. In this
case, an Adjustment of +36.11% would apply. The following demonstrates the
calculation: Calculate the fractional time-elapsed adjustment by dividing
26 months by 36 months (equals 72.22%), then multiply by the endpoints for
the range over which the positive or negative Adjustment applies [(26/36) x
3.0% to (26/36) x 6.0% = 2.16% to 4.33%]. Given the portfolio's cumulative
performance of +5.0% is greater
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1 For purposes of applying the Adjustment, the Basic Fee will be calculated
based on average month-end net assets over the same time period for which
performance is measured.
than the time-elapsed adjusted range of +2.16% to +4.33%, multiply the
fractional time-elapsed adjustment of 72.22% by the corresponding maximum
adjustment for the time-elapsed adjusted range of greater than +4.33% or
(72.22%)(50.0%) = +36.11%. (Note: actual calculations will be rounded to
the third decimal point.)
(c) ON AND AFTER AUGUST 1, 2006. 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 the Adviser's compensation:
(a) WELLINGTON MANAGEMENT PORTFOLIO UNIT VALUE. The "Wellington Management
Portfolio unit value" shall be determined by dividing the total net assets
of the Wellington Management Portfolio by a given number of units. The
number of units in the Wellington Management 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 Wellington Management Portfolio, the number of units of the Wellington
Management Portfolio shall be adjusted based on the unit value of the
Wellington Management Portfolio on the day such changes are executed.
(b) WELLINGTON MANAGEMENT PORTFOLIO PERFORMANCE. The investment performance of
the Wellington Management Portfolio for any period, expressed as a
percentage of the Wellington Management Portfolio unit value at the
beginning of the period, will be the sum of: (i) the change in the
Wellington Management Portfolio unit value during such period; (ii) the
unit value of the Fund's cash distributions from the Wellington Management
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 Wellington Management Portfolio, expressed as a
percentage of the Wellington Management Portfolio unit value at the
beginning of such period. For this purpose, the value of distributions of
realized capital gains per unit of the Wellington Management Portfolio, of
dividends per unit of the Wellington Management Portfolio paid from
investment income, and of capital gains taxes per unit of the Wellington
Management Portfolio paid or payable on undistributed realized long-term
capital gains shall be treated as reinvested in units of the Wellington
Management Portfolio at the unit value in effect at the close of business
on the record date for the payment of such distributions and dividends
(which date shall be the relevant ex-dividend date) 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 the Xxxxx Xxxxxxx Company to calculate the Index
returns.
(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation of
the investment performance of the Wellington Management Portfolio and the
investment record of the Index shall be in accordance with any then
applicable rules of the U.S. Securities and Exchange Commission.
(e) EFFECT OF TERMINATION. In the event of termination of this Agreement, the
fees provided in this Agreement will be computed on the basis of the period
ending on the last business day on which this Agreement is in effect,
subject to a pro rata adjustment based on the number of days the Adviser
performed services hereunder during the fiscal quarter in which such
termination becomes effective as a percentage of the total number of days
in such quarter.
5. REPORTS. The Fund and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders,
certified copies of their financial statements, and such other
information with regard to their affairs as each may reasonably
request, including, but not limited to, information about changes
in partners of the Adviser (to the extent applicable).
6. COMPLIANCE. The Adviser agrees to comply with all policies,
procedures or reporting requirements that the Board of Trustees
of the Trust reasonably adopts and communicates to the Adviser in
writing, including, without limitation, any such policies,
procedures or reporting requirements relating to soft dollar or
directed brokerage arrangements.
7. STATUS OF ADVISER. The services of the Adviser to the Fund are
not to be deemed exclusive, and the Adviser will be free to
render similar services to others so long as its services to the
Fund are not impaired thereby. The 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 Fund in any way or otherwise be deemed an agent of the Fund
or the Trust.
8. LIABILITY OF ADVISER. No provision of this Agreement will be
deemed to protect the Adviser against any liability to the Fund
or its shareholders to which it might otherwise be subject by
reason of any willful misfeasance, bad faith or gross negligence
in the performance of its duties or the reckless disregard of its
obligations under this Agreement.
9. FORCE MAJEURE. The Adviser shall not be responsible for any loss
or damage, or failure to comply or reasonable delay in complying
with any duty or obligation, under or pursuant to this Agreement
arising as a direct or indirect result of any reason, cause or
contingency beyond its reasonable control, including (without
limitation) natural disasters, nationalization, currency
restrictions, act of war, act of terrorism, act of God, postal or
other strikes or industrial actions, or the failure, suspension
or disruption of any relevant stock exchange or market. The
Adviser shall notify the Fund promptly when it becomes aware of
any event described above. The Fund shall not be responsible for
temporary delays in the performance of the Fund's duties and
obligations hereunder and correspondingly
shall not be liable for any loss or damage attributable to such
delay in consequence of any event described above.
10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will
become effective on the date hereof and will continue in effect
for a period of two years thereafter, and shall continue in
effect for successive twelve-month periods thereafter, only so
long as each such successive continuance is approved at least
annually by votes of the Trust's Board of Trustees who are not
parties to such Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of
voting on such approval. In addition, the question of continuance
of the Agreement may be presented to the shareholders of the
Fund; in such event, such continuance will be effected only if
approved by the affirmative vote of a majority of the outstanding
voting securities of the Fund.
Notwithstanding the foregoing, however, (i) this Agreement may at any time
be terminated without payment of any penalty either by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Fund, on sixty days' written notice to the Adviser, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the 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 as follows:
If to the Fund, at:
Vanguard Dividend Growth Fund
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Portfolio Review Group
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Adviser, at:
Wellington Management Company, LLP
00 Xxxxx Xxxxxx
Xxxxxx, XX 00000
Attention: Xxxx X. Xxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
This Agreement may be amended by mutual consent, but the consent of the
Trust must be approved (i) by a majority of those members of the Board of
Trustees who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
amendment, and (ii) to the extent required by the 1940 Act, by a vote of a
majority of the outstanding voting securities of the Fund of the Trust.
As used in this Section 9, the terms "assignment," "interested persons,"
and "vote of a majority of the outstanding voting securities" will have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
11. SEVERABILITY. If any provision of this Agreement will be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement will not be affected thereby.
12. CONFIDENTIALITY. The Adviser shall keep confidential any and all
information obtained regarding the Trust in connection with the
services rendered hereunder and shall not disclose any such
information to any person other than the Trust, the Board of
Directors of the Trust, The Vanguard Group, Inc. ("Vanguard"),
and any director, officer, or employee of the Trust or Vanguard,
except (i) with the prior written consent of the Trust, (ii) as
required by law, regulation, court order or the rules or
regulations of any self-regulatory organization, governmental
body or official having jurisdiction over the Adviser, or (iii)
for information that is publicly available other than due to
disclosure by the Adviser or its affiliates or becomes known to
the Adviser from a source other than the Trust, the Board of
Directors of the Trust, or Vanguard.
13. PROXY POLICY. The Adviser acknowledges that The Vanguard Group,
Inc. will vote the shares of all securities that are held by the
Fund unless other mutually acceptable arrangements are made with
the Adviser with respect to the Wellington Management Portfolio.
14. GOVERNING LAW. All questions concerning the validity, meaning,
and effect of this Agreement shall be determined in accordance
with the laws (without giving effect to the conflict-of-interest
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 Investment Advisory
Agreement to be executed as of the date first set forth herein.
WELLINGTON MANAGEMENT VANGUARD SPECIALIZED FUNDS
COMPANY, LLP
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Signature Date Signature Date
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