INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1" day of August, 2000, between VANGUARD EXPLORER
FUND, a Delaware business trust (the "Fund"), and XXXXXXXX INVESTMENT
MANAGEMENT, INC., a Massachusetts Corporation (the "Adviser").
WHEREAS, the Fund is an open-end, diversified management investment company
registered under the 1940 Act, as amended; and
WHEREAS, the Fund desires to retain Adviser to render investment advisory
services to certain assets of the Fund which the Board of Trustees of the Fund
determines to assign to Adviser (referred to in this Agreement as the "Xxxxxxxx
Portfolio"), and Adviser is willing to render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H
that in consideration of the premises and mutual promises hereinafter set forth,
the parties hereto agree as follows:
1. APPOINTMENT OF ADVISER. The Fund hereby employs Adviser as investment
adviser, on the terms and conditions set forth herein, for the assets of the
Xxxxxxxx Portfolio. The Board of Trustees may, from time to time, make additions
to, and withdrawals from, the assets of the Fund assigned to Adviser. Adviser
accepts such employment and agrees to render the services herein set forth, for
the compensation herein provided.
2. DUTIES OF ADVISER. The Fund employs Adviser to manage the investment and
reinvestment of the assets of the Xxxxxxxx Portfolio, to continuously review,
supervise and administer an investment program for such assets of the Fund, to
determine in its discretion the securities to be purchased or sold and the
portion of such assets to be held uninvested, to provide the Fund with all
records concerning the activities of Adviser that the Fund is required .to
maintain, and to render regular reports to the Fund's officers and Board of
Trustees concerning the discharge of the foregoing responsibilities. Adviser
will discharge the foregoing responsibilities subject to the control of the
officers and the Board of Trustees of the Fund, and in compliance with the
objectives, policies and limitations set forth in the Fund's prospectus, any
additional operating policies or procedures that the Fund communicates to the
Adviser in writing, and applicable laws and regulations. Adviser agrees to
provide, at its own expense, the office space, furnishings and equipment and the
personnel required by it to perform the services on the terms and for the
compensation provided herein.
3. SECURITIES TRANSACTIONS. Adviser is authorized to select the brokers or
dealers that will execute purchases and sales of securities for the Xxxxxxxx
Portfolio, and is directed to use its best efforts to obtain the best available
price and most favorable execution for such
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transactions, except as otherwise permitted by the Board of Trustees of the Fund
pursuant to written policies and procedures provided to the Adviser. The Adviser
may also be authorized to effect individual securities transactions at
commission rates in excess of the minimum commission rates available, if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage or research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the Fund and the other Funds
in the same Fund Group. Adviser will promptly communicate to the Fund's officers
and Board of Trustees such information relating to portfolio transactions as
they may reasonably request.
4. COMPENSATION OF ADVISER. For the services to be rendered by Adviser as
provided in this Agreement, the Fund will pay to Adviser at the end of each of
the Fund's fiscal quarters, a Basic Fee calculated by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end net
assets of the Xxxxxxxx Portfolio for the quarter:
.300% on the first $500 million of net assets;
.200% on the next $250 million of net assets;
.150% on the next $250 million of net assets;
.l00% on net assets in excess of $1 billion.
The Basic Fee, as provided above, will be increased or decreased by applying a
Performance Fee Adjustment (the "Adjustment") based on the investment
performance of the Xxxxxxxx Portfolio relative to the investment performance of
the Xxxxxxx 2000 Growth Index (the "Index"). The investment performance of the
Xxxxxxxx Portfolio will be based on the cumulative return over a trailing
36-month period ending with the applicable quarter, relative to the cumulative
total return of the Index for the same time period. The Adjustment applies as
follows:
CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
XXXXXXXX PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
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Trails by -12% or more Decrease by .01875%
Trails by more than -6% up to -12% Decrease by .009375%
Trails/Exceeds by -6% through 6% No adjustment
Exceeds by more than 6% but les2% Increase by .009375%
Exceeds by 12% or more Increase by .01875%
* For purposes of determining the fee adjustment calculation, the basic fee is
calculated by applying the quarterly rate against the net assets of the Fund
averaged over the same time period for which the performance is measured.
4.1. Other Special Rules Relating to Adviser's Compensation. The Index will not
be fully operable as the sole performance index used to determine the Adviser's
Adjustment until the quarter ending July 31, 2003. Until that date, the
Adviser's Adjustment will be determined
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by linking the investment performance of the Index and that of the Small Company
Growth Fund Stock Index (the "Prior Index") as follows.
(a) QUARTER ENDING OCTOBER 31, 2000. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the eleven quarters
ending July 31, 2000, with that of the Index for the one quarter ending October
31, 2000.
(b) QUARTER ENDING JANUARY 31, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the ten quarters
ending July 31, 2000, with that of the Index for the two quarters ending January
31, 2001.
(c) QUARTER ENDING APRIL 30, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the nine quarters
ending July 31, 2000, with that of the Index for the three quarters ending April
30, 2001.
(d) QUARTER ENDING JULY 31, 2001. The Adviser's Adjustment will be determined by
linking the investment performance of the Prior Index for eight quarters ending
July 31, 2000, with that of the Index for the four quarters ending July 31,
2001.
(e) QUARTER ENDING OCTOBER 31, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the seven quarters
ending July 31,2000, with that of the Index for the five quarters ending October
31, 2001.
(f) QUARTER ENDING JANUARY 31, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the six quarters
ending July 31, 2000, with that of the Index for the six quarters ending January
31, 2002.
(g) QUARTER ENDING APRIL 30, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the five quarters
ending July 31, 2000, with that of the Index for the seven quarters ending April
30, 2002.
(h) QUARTER ENDING JULY 31, 2002. The Adviser's Adjustment will be determined by
linking the investment performance of the Prior Index for four quarters ending
July 31, 2000, with that of the Index for the eight quarters ending July 31,
2002.
(i) QUARTER ENDING OCTOBER 31, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the
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three quarters ending July 31, 2000, with that of the Index for the nine
quarters ending October 31, 2002.
(j) QUARTER ENDING JANUARY 31, 2003. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the two quarters
ending July 31, 2000, with that of the Index for the ten quarters ending January
31, 2003.
(k) QUARTER ENDING APRIL 30, 2003. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Index for the one quarter
ending July 31, 2000, with that of the Index for the eleven quarters ending
April 30, 2003.
(1) QUARTER ENDING JULY 31, 2003. The Index will be fully operable.
4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
(a) PORTFOLIO PERFORMANCE. The investment performance of the Xxxxxxxx Portfolio
for any period, expressed as a percentage of the "Xxxxxxxx Portfolio unit value"
per share at the beginning of the period, will be the sum of: (i) the change in
the Xxxxxxxx Portfolio's net asset value per share during the period; (ii) the
unit value of the Fund's cash distributions from Xxxxxxxx Portfolio's net
investment income and realized net capital gains (whether short or long term)
having an ex-dividend date occurring within the period; (iii) the unit value of
capital gains taxes paid or accrued during such period by the Fund for
undistributed realized long-term capital gains realized by the Xxxxxxxx
Portfolio. For this purpose, the unit value of distributions per share of
realized capital gains, of dividends per share paid from investment income and
of capital gains taxes per share paid or payable on undistributed realized long-
term capital gains shall be treated as reinvested in the Xxxxxxxx Portfolio at
the unit value in effect at the close of business on the record date for the
payment of such distributions and dividends and the date on which provision is
made for such taxes, after giving effect to such distributions, dividends and
taxes.
(b) "XXXXXXXX PORTFOLIO UNIT VALUE." The "Xxxxxxxx Portfolio unit value" will be
determined by dividing the total net assets of the Xxxxxxxx Portfolio by a given
number of units. Initially, the number of units in the Xxxxxxxx Portfolio will
equal the total shares outstanding of the Fund on August 1, 2000. Subsequently,
as assets are added to or withdrawn from the Xxxxxxxx Portfolio, the number of
units of the Xxxxxxxx Portfolio will be adjusted based on the unit value of the
Xxxxxxxx Portfolio on the day such changes are executed. Any cash buffer
maintained by the Fund outside of the Xxxxxxxx Portfolio shall neither be
included in the total net assets of the Xxxxxxxx Portfolio nor included in the
computation of the Xxxxxxxx Portfolio Unit Value.
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(c) INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period, will be
the sum of: (i) the change in the level of the Index during the period; (ii) the
value, computed consistently with the Index, of cash distributions having an ex-
dividend date occurring within the period made by companies whose securities
comprise the Index. For this purpose, cash distributions on the securities which
comprise 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.
(d) EFFECT OF TERMINATION. In the event of termination of this Agreement,
the fees provided in this Agreement will be computed on the basis of the period
ending on the last business day on which this Agreement is in effect, subject to
a pro rata adjustment based on the number of days elapsed in the current fiscal
quarter as a percentage of the total number of days in such quarter.
5. REPORTS. The Fund and Adviser agree to furnish to each other 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.
6. COMPLIANCE. Adviser agrees to comply with all policies, procedures or
reporting requirements that the Board of Trustees of the Fund reasonably adopts
and communicates to Adviser in writing, including any such policies, procedures
or reporting requirements relating to soft dollar or directed brokerage
arrangements.
7. STATUS OF ADVISER. The services of Adviser to the Fund are not to be deemed
exclusive, and Adviser will be free to render similar services to others so long
as its services to the Fund are not impaired thereby. Adviser will be deemed to
be an independent contractor and will, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect 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. DURATION AND TERMINATION. This Agreement will become effective on August 1,
2000, and will continue in effect thereafter only so long as such continuance is
approved at least annually by votes of the Fund'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.
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Provided, however, that (i) this Agreement may at any time be terminated
without payment of any penalty either by vote of the Board of Trustees of the
Fund or by vote of a majority of the outstanding voting securities of the Fund,
on sixty days' written notice to Adviser, (ii) this Agreement will automatically
terminate in the event of its assignment, and (iii) this Agreement may be
terminated by Adviser on ninety days' written notice to the Fund. Any notice
under this Agreement will be given in writing, addressed and delivered, or
mailed postpaid, to the other party at any office of such party.
As used in this Section 9, the terms "assignment," "interested persons," a
"vote of a majority of the outstanding voting securities" will have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the Investment Company Act of 1940.
10. 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.
11. PROXY POLICY. With regard to the solicitation of shareholder votes, the Fund
will vote the shares of all securities held by the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed this 24th day of July, 2000.
ATTEST: VANGUARD EXPLORER FUND:
By /S/ XXXXXXX XXXXXX By /S/ XXXX X. XXXXXXX
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Chairman, CEO and President
ATTEST: XXXXXXXX INVESTMENT MANAGEMENT, INC.
By /S/ XXXXX XXXXXXXX By /S/ XXXX X. XXXXXXXX
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Xxxx X. Xxxxxxxx
