EXECUTION COPY
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 19th day of April, 2004, between VANGUARD
TRUSTEES' EQUITY FUNDS, a Delaware statutory trust (the "Trust"), and Xxxxxxx X.
Xxxxxxxxx & Co., LLC, a Delaware limited liability company (the "Advisor").
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
International Value Fund (the "Fund"); and
WHEREAS, the Trust desires to retain the Advisor to render investment
advisory services to the Fund, and the Advisor 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 Advisor hereby agree as follows:
1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as
investment advisor, 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 Advisor from
time to time (referred to in this Agreement as the "Xxxxxxxxx Portfolio"). As of
the date of this Agreement, the Xxxxxxxxx Portfolio will consist of the portion
of the assets of the Fund that the Board of Trustees has determined to assign to
the Advisor, as communicated to the Advisor on behalf of the Board of Trustees
by The Vanguard Group, Inc. ("Vanguard"). The Board of Trustees may, from time
to time, make additions to, and withdrawals from, the assets of the Fund
assigned to the Advisor. The Advisor accepts such employment and agrees to
render the services herein set forth, for the compensation herein provided.
2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the
investment and reinvestment of the assets of the Xxxxxxxxx Portfolio; to
continuously review, supervise, and administer an investment program for the
Xxxxxxxxx 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 Advisor that
the Fund is required to maintain; and to render regular reports to the Trust's
officers and Board of Trustees concerning the discharge of the foregoing
responsibilities. The Advisor will discharge the foregoing responsibilities
subject to the supervision and oversight of the Trust'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
Advisor in writing, and applicable laws and regulations. The Advisor agrees to
provide, at its own expense, the office space, furnishings and equipment, and
personnel required by it to perform the services on the terms and for the
compensation provided herein. The Advisor may utilize the services of the
investment professionals of Alliance Capital Management L.P.'s Xxxxxxxxx value
investment unit for purposes of performing the responsibilities of the Advisor
under this Agreement, subject to the Advisor retaining overall responsibility
for such services and any and all obligations and liabilities in connection
therewith.
3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the brokers
or dealers that will execute purchases and sales of securities for the Xxxxxxxxx
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 (the "SEC") or its staff, and other applicable law, the Advisor 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 Advisor
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
Advisor'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. The Advisor agrees to use its best efforts to comply
with any directed brokerage or other brokerage arrangements that the Fund
communicates to the Advisor in writing. The Advisor will promptly communicate to
the Trust's officers and the Board of Trustees any information relating to the
portfolio transactions the Advisor has directed on behalf of the Xxxxxxxxx
Portfolio as such officers or the Board may reasonably request.
4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor
pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor
agrees to accept as full compensation therefore, an investment advisory fee at
the rate specified in Schedule A to this Agreement. The fee will be calculated
based on annual percentage rates applied to the average month-end net assets of
the Xxxxxxxxx Portfolio and will be paid to the Advisor quarterly.
5. REPORTS. The Fund and the Advisor 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 Advisor.
6. COMPLIANCE.
6.1. COMPLIANCE WITH APPLICABLE LAWS AND BOARD REQUIREMENTS. The Advisor
agrees to comply with all Applicable Laws and all policies, procedures
or reporting requirements that the Board of Trustees of the Trust
reasonably adopts and communicates to the Advisor in writing,
including, without limitation, any such policies, procedures or
reporting requirements relating to soft dollar or directed brokerage
arrangements.
6.2. DISCLOSURE OF COMPLIANCE MATTERS. If the Advisor receives any written
or other communication concerning or constituting a Compliance Matter,
then the Advisor shall provide the Trust a written summary of the
material facts and circumstances concerning such Compliance Matter
within ten (10) calendar days of the earlier of the date on which such
Compliance Matter was received by the Advisor, or the date on which
the general counsel's office of the Advisor obtained actual knowledge
of such Compliance Matter. The Advisor shall provide the Trust with a
written summary of any material changes in the facts or circumstances
concerning any Compliance Matter within ten (10) calendar days of the
occurrence of such changes.
2
6.3. CERTAIN DEFINITIONS. "Applicable Laws" means, with respect to any
party to this Agreement, (i) the "federal securities laws" as defined
in Rule 38a-1(e)(1) under the 1940 Act, as amended from time to time,
and (ii) any and all other laws, rules, and regulations, whether
foreign or domestic, in each case applicable at any time and from time
to time to such party. "Compliance Matter" means any written or other
communication sent to the Advisor by any United States federal or
state agency or regulatory authority or any self-regulatory authority,
in each case having jurisdiction over the Advisor, in connection with
the Advisor's compliance with, or failure to comply with, Applicable
Laws as they relate to the Advisor's investment management operations.
For the avoidance of doubt, the term "Advisor" as used in this Section
6 shall include both Xxxxxxx X. Xxxxxxxxx & Co., LLC and Alliance
Capital Management L.P.
7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not to be
deemed exclusive, and the Advisor will be free to render similar services to
others so long as its services to the Fund are not impaired thereby. The Advisor
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 ADVISOR. No provision of this Agreement will be deemed to
protect the Advisor 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. LIMITATIONS ON CONSULTATIONS. The Advisor is prohibited from consulting
with other advisors of the Fund, except Vanguard, concerning transactions for
the Fund in securities or other assets.
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 this Agreement 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.
3
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 thirty days' written notice to the Advisor, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the Advisor 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 Trustees' Equity Fund - Vanguard International Value Fund
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Advisor, at:
Xxxxxxx X. Xxxxxxxxx & Co., LLC
0000 Xxxxxx xx xxx Xxxxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxx X. Xxxxxx
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. Each party to this Agreement may obtain (such party, a
"Receiving Party") from the other party to this Agreement or an affiliate
thereof (such party, a "Disclosing Party") information in connection with the
services rendered hereunder and relating directly or indirectly to the Advisor,
the Fund, the Trust, Vanguard or a Compliance Matter (collectively,
"Confidential Information"). Each party to this Agreement shall keep
confidential any and all Confidential Information and shall not disclose any
4
Confidential Information to any person other than the Advisor, the Fund, the
Trust, the Board of Directors of the Trust, Vanguard, and any director, officer,
or employee of the Advisor, the Fund, the Trust, or Vanguard, except (i) with
the prior written consent of a Disclosing Party, (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
Receiving Party, or (iii) for Confidential Information that is publicly
available other than due to disclosure by the Receiving Party or its affiliates
or becomes known to the Receiving Party from a source other than a Disclosing
Party. None of the parties may use or permit the use of Confidential Information
in violation of Applicable Laws.
13. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the
shares of all securities that are held by the Fund unless other mutually
acceptable arrangements are made with the Advisor with respect to the Xxxxxxxxx
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-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
5
IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory
Agreement to be executed as of the date first set forth herein.
XXXXXXX X. XXXXXXXXX & CO., LLC VANGUARD TRUSTEES' EQUITY FUNDS
----------------- --------- ------------------ -----------
Signature Date Signature Date
--------------- --------- ----------------- ------------
Print Name Date Print Name Date
6
SCHEDULE A
Pursuant to Section 4 of the Agreement, the Fund shall pay the Advisor
compensation as follows:
1.1. Calculation of the Base Fee. The Base Fee for each fiscal quarter of
the Fund is calculated by multiplying an Annual Percentage Rate (shown
below) to the average month-end net assets of the Xxxxxxxxx Portfolio,
during such fiscal quarter, and dividing the result by 4. The Fund's
fiscal quarter ends are the months ending October, January, April, and
July.
---------------------------------------------------------------------
Annual Percentage Rate Schedule
---------------------------------------------------------------------
Average Month-End Annual Percentage Rate
Net Assets
---------------------------------------------------------------------
On the first $1.0 billion 0.220%
---------------------------------------------------------------------
On the next $1.5 billion 0.180%
---------------------------------------------------------------------
Over $2.5 billion 0.160%
---------------------------------------------------------------------
1.2. Calculation of the Performance Adjustment. The Performance Adjustment
for each fiscal quarter of the Fund shall be calculated by multiplying
the appropriate Adjustment Percentage (shown below) to the Annual
Percentage Rate applied to the average of the month-end net assets of
the Xxxxxxxxx Portfolio over the previous 60 months, and dividing the
result by four. The Adjustment Percentage for each fiscal quarter of
the Xxxxxxxxx Portfolio shall be determined by applying the following
Performance Adjustment Schedule to the cumulative performance of the
Xxxxxxxxx Portfolio relative to the Xxxxxx Xxxxxxx Capital
International All Country World Index Excluding The United States of
America (the "Index") over the rolling 60-month period applicable to
such fiscal quarter. (See Fee Example #1.)
------------------------------------------------------------------------------------------------------------------
PERFORMANCE ADJUSTMENT SCHEDULE
------------------------------------------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OF XXXXXXXXX PORTFOLIO
VS. ADJUSTMENT PERCENTAGE
INDEX OVER APPLICABLE 60-MONTH PERIOD
------------------------------------------------------------------------------------------------------------------
More than +15% +60%
------------------------------------------------------------------------------------------------------------------
Greater than 0% up to and including +15% Linear increase between 0% to +60%
------------------------------------------------------------------------------------------------------------------
From -15% up to and including 0% Linear decrease between -60% to 0%
------------------------------------------------------------------------------------------------------------------
Less than -15% -60%
--------------------------------------------------------------- --------------------------------------------------
1.3. Transition Rules for Calculating Advisor's Compensation. The
Performance Adjustment will not be fully incorporated into the
determination of the Adjusted Fee until the fiscal quarter ended April
30, 2009. Until that date, the following transition rules will apply:
A-1
(a) APRIL 19, 2004 THROUGH JANUARY 31, 2005. The Adjusted Fee will be
deemed to equal the Base Fee. No Performance Adjustment will apply to
the calculation of the Adjusted Fee during this period.
(b) FEBRUARY 1, 2005 THROUGH APRIL 30, 2009. Beginning February 1, 2005,
the Performance Adjustment will take effect on a progressive basis
with regard to the number of months elapsed between April 30, 2004,
and the end of the quarter for which the Adjusted Fee is being
computed. During this period, the Base Fee for purposes of calculating
the Performance Adjustment will be computed using the average
month-end net assets of the Xxxxxxxxx Portfolio, as determined for a
period commencing May 1, 2004, and ending as of the end of the
applicable fiscal quarter of the Fund. During this period, the
Performance Adjustment will be calculated using the cumulative
performance of the Xxxxxxxxx Portfolio and the Index for a period
commencing May 1, 2004 and ending as of the end of the applicable
fiscal quarter of the Fund. For these purposes, the endpoints and the
size of the range over which a positive or negative adjustment
percentage applies and the corresponding maximum adjusted percentage
will be multiplied by a time-elapsed fraction. The fraction will equal
the number of months elapsed since April 30, 2004, divided by 60. (See
Fee Example #2.)
(c) ON AND AFTER APRIL 30, 2009. The Adjusted Fee will be equal to the
Base Fee plus the Performance Adjustment.
1.4. OTHER SPECIAL RULES RELATING TO ADVISOR'S COMPENSATION. The following
special rules will also apply to the Advisor's compensation:
(a) XXXXXXXXX PORTFOLIO UNIT VALUE. The "Xxxxxxxxx Portfolio unit value"
shall be determined by dividing the total net assets of the Xxxxxxxxx
Portfolio by a given number of units. The number of units in the
Xxxxxxxxx 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 Xxxxxxxxx Portfolio,
the number of units in the Xxxxxxxxx Portfolio shall be adjusted based
on the unit value of the Xxxxxxxxx Portfolio on the day such changes
are executed.
(b) XXXXXXXXX PORTFOLIO PERFORMANCE. The investment performance of the
Xxxxxxxxx Portfolio for any period, expressed as a percentage of the
Xxxxxxxxx Portfolio unit value at the beginning of the period, will be
the sum of: (i) the change in the Xxxxxxxxx Portfolio unit value
during such period; (ii) the unit value of the Fund's cash
distributions from the Xxxxxxxxx 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
A-2
by the Xxxxxxxxx Portfolio, expressed as a percentage of the Xxxxxxxxx
Portfolio unit value at the beginning of such period. For this
purpose, the value of distributions of realized capital gains per unit
of the Xxxxxxxxx Portfolio, of dividends per unit of the Xxxxxxxxx
Portfolio paid from investment income, and of capital gains taxes per
unit of the Xxxxxxxxx Portfolio paid or payable on undistributed
realized long-term capital gains shall be treated as reinvested in
units of the Xxxxxxxxx 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. For purposes of calculating investment performance, the
Xxxxxxxxx Portfolio unit value will be determined net of all fees and
expenses of the Fund attributable to the Xxxxxxxxx Portfolio. Thus,
the performance of the Xxxxxxxxx Portfolio will be net of all fees and
expenses of the Fund attributable to the Xxxxxxxxx Portfolio when
compared to the Index.
(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
Index provider.
(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the Xxxxxxxxx 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 Advisor 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.
A-3
1. Fee Example #1 - Adjusted Fee Calculation: The following example serves as a
guide for the calculation of the Adjusted Fee when the cumulative excess return
of the portfolio versus the Index falls within the linear adjustment range:
"Greater than 0% up to and including +15%".
Assume the Adjusted Fee for the fiscal quarter ending April 30, 2009 is
being calculated, the transition rules described in Schedule A, section 13.3.
are not in effect, and the month-end net assets of the Xxxxxxxxx Portfolio over
the rolling 60-month period applicable to such fiscal quarter are as follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF XXXXXXXXX PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2004 501 502 503 504 505 506 507 508
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2005 509 510 511 512 513 514 515 516 517 518 519 520
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2006 521 522 523 524 525 526 527 528 529 530 531 532
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2007 533 534 535 536 537 538 539 540 541 542 543 544
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2008 545 546 547 548 549 550 551 552 553 554 555 556
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2009 557 558 559 560
----------------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the Xxxxxxxxx Portfolio over the
rolling 60-month period applicable to such fiscal quarter is +17.5%, and the
cumulative performance of the Index over such period is +10.0%. Thus, the excess
return of the Xxxxxxxxx Portfolio over the applicable period is +7.5%. The
Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending
April 30, 2009 would be $394,982.50 and is calculated as follows:
A. BASE FEE OF $307,450.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the Xxxxxxxxx Portfolio over the fiscal quarter ending
April 30, 2009 ($559,000,000), with an Annual Percentage Rate of (0.22%)
applied. Therefore, the Base Fee is equal to: Base Fee = (a X b) /4, where;
a = Average month-end net assets over the fiscal quarter ending April
30, 2009, calculated as follows:
($558,000,000 + $559,000,000 + $560,000,000) / 3 = $559,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.22%)
Base Fee = ($559,000,000 X 0.22%) / 4 = $307,450.00
B. PERFORMANCE ADJUSTMENT OF +$87,532.50, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the Xxxxxxxxx Portfolio over the rolling
60-month period applicable to the fiscal quarter ending April 30, 2009 are
$530,500,000. The excess return of the Xxxxxxxxx Portfolio (+17.5%) over the
Index (+10.0%) over such period is +7.5%. An excess return of +7.5%, when
applied to the Performance Adjustment Schedule, corresponds to an excess return
of 0% up to and including +15%, which corresponds to an Adjustment Percentage of
+30.0%. The performance adjustment percentage is calculated as follows:
A-4
The Performance Adjustment Percentage = ([c / d] X e), where;
c = Excess return over the performance period, (= +7.5%)
d = Maximum excess return for appropriate performance range, ( = +15.0%)
e = Maximum Adjustment Percentage for appropriate performance range, (=+60%)
Performance Adjustment Percentage = (7.5%/15.0%) X +60% = 30.0%
Therefore, the Performance Adjustment = ([f X g] X h) / 4
f = Performance Adjustment Percentage, (= 30.0%)
g = Annual Percentage Rate applied to average month end net assets, (= 0.22%)
h = Average month-end net assets for the 60-months ended
April 30, 2009, (= $530,500,000)
Performance Adjustment = ([30.0% X 0.22%] X $530,500,000) / 4 = +$87,532.50
C. AN ADJUSTED FEE OF $394,982.50, WHICH IS CALCULATED AS FOLLOWS:
Adjusted Fee = i + j, where;
i = Base Fee, ( = $307,450.00)
j = Performance Adjustment, ( = $87,532.50)
Adjusted Fee = $307,450.00 + $87,532.50 = $394,982.50
D. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the Xxxxxxxxx Portfolio
and the Index are treated in a symmetric manner, such as in the example.
A-5
2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The
following example serves as a guide for the calculation of the Adjusted Fee
during the transition period when the cumulative excess return of the portfolio
versus the Index falls within the linear adjustment range: "Greater than 0% up
to and including +15%".
Assume that the Advisor's compensation is being calculated for the fiscal
quarter ended October 31, 2006 and the month-end net assets of the Xxxxxxxxx
Portfolio over the 30-month period applicable to such fiscal quarter are as
follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF XXXXXXXXX PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2004 501 502 503 504 505 506 507 508
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2005 509 510 511 512 513 514 515 516 517 518 519 520
---------- -------- -------- -------- --------- -------- ------- -------- -------- -------- -------- -------- --------
2006 521 522 523 524 525 526 527 528 529 530
----------------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the Xxxxxxxxx Portfolio over the
30-month period applicable to the October 31, 2006 fiscal quarter is +13.75%,
and the cumulative performance of the Index over such period is +10.0%. Thus,
the excess return of the Xxxxxxxxx Portfolio over the applicable period is
+3.75%. The Adjusted Fee payable by the Fund to the Advisor for the fiscal
quarter ending October 31, 2006 would be $333,478.75 and is calculated as
follows:
A. BASE FEE OF $290,950.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the Xxxxxxxxx Portfolio over the fiscal quarter ending
October 31, 2006 ($529,000,000), when applied to the Annual Percentage Rate of
(0.22%). Therefore, the Base Fee is equal to:
Base Fee = (a X b) / 4, where;
a = Average month-end net assets over the fiscal quarter ending October 31,
2006, calculated as follows:
($528,000,000 + $529,000,000 + $530,000,000) / 3 = $529,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.22%)
Base Fee = ($529,000,000 X 0.22%) / 4 = $290,950.00
B. PERFORMANCE ADJUSTMENT OF +$42,528.75, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the Xxxxxxxxx Portfolio over the performance
period (May 1, 2004 to October 31, 2006) are $515,500,000. The excess return of
the Xxxxxxxxx Portfolio (+13.75%) over the Benchmark (+10.0%) over such period
is +3.75%. An excess return of +3.75%, when applied to the Performance
Adjustment Schedule, corresponds to a relative performance of 0% and up to and
including +15%, which corresponds to an Adjustment Percentage of +15.0%,
calculated as follows:
A-6
The Performance Adjustment Percentage = ([c / d] X k), where;
c = Percentage amount by which the performance of the Portfolio has
exceeded the Benchmark, ( = +3.75%)
d = Maximum Transition Period excess return for appropriate
performance range, determined as follows:
[(e / f) X g], where;
e = Number of months elapsed from April 30, 2004 to October 31, 2006 (= 30)
f = Number of months in full rolling performance period (= 60)
g = Maximum excess return for appropriate performance range (= +15.0%)
d = [(30/60) X +15.0%] = +7.5%
Maximum Transition Period Adjustment Percentage = [(e / f) X h] = k, where;
e = Number of months elapsed from April 30, 2004 to October 31, 2006 (= 30)
f = Number of months in full rolling performance period (= 60)
h = Maximum Adjustment Percentage for the appropriate performance range (= +60%)
Maximum Adjustment Percentage for transition period =
[(30/60) X +60%) = +30.0% = k
Adjustment Percentage = ([c / d]) X k) = l, therefore,
([+3.75%/+7.5%] X +30.0%) =
+15.0% = l
Therefore, the Performance Adjustment is equal to ([l X m] X n) / 4, where;
l = Adjustment Percentage, ( = +15.0%)
m = Annual Percentage Rate applied to average month-end net assets, ( = 0.22%)
n = Average month-end net assets for the transition period ended
October 31, 2006, (= $515,500,000)
Performance Adjustment = ([+15.0% X 0.22%] X $515,500,000) / 4 = +$42,528.75
A-7
C. AN ADJUSTED FEE OF $333,478.75, WHICH IS CALCULATED AS FOLLOWS:
o + p = Adjusted Fee, where;
o = Base Fee, ( = $290,950.00)
p = Performance Adjustment, ( = $42,528.75)
Adjusted Fee = $290,950.00 + $42,528.75= $333,478.75
D. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the Xxxxxxxxx Portfolio
and the Index are treated in a symmetric manner, such as in the example.
A-8
