INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of June, 2000, between VANGUARD FENWAY
FUNDS, a Delaware business trust (the "Trust"), and XXXXXX INVESTMENT PARTNERS,
INC., a Pennsylvania corporation (the "Adviser").
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, the Trust currently offers two series of shares, one of which is
known as Vanguard Growth Equity 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, 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 Trust hereby employs the Adviser as
investment adviser to the Fund, on the terms and conditions set forth herein.
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 Fund, to continuously review,
supervise and administer an investment program for 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 records concerning the
activities of the Adviser 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 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. 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 Fund, and
is directed to
use its best efforts to obtain the best available price and most favorable
execution for such 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 Vanguard Group of Investment Companies. The
Adviser will promptly communicate to the Trust'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 the Adviser
as provided in this Agreement, the Fund will pay to Advisor at the end of each
calendar quarter, 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 Fund for the then ended quarter.
AVERAGE MONTH-END
ANNUAL RATE NET ASSETS FOR THE QUARTER
------------- ---------------------------
0.50% First $200 million
0.40% Next $300 million
0.30% Next $1.5 billion
0.20% Over$2 billion
Subject to the transition rules described below, the Basic Fee, as provided
above, will be increased or decreased by the amount of a Performance Fee
Adjustment ("Adjustment"). The Adjustment will be calculated as a percentage of
the Basic Fee and will change proportionately with the investment performance of
the Fund relative to the investment performance of the Xxxxxxx 1000 Growth Index
(the "Index") for the thirty-six (36) month period ending with the then ended
quarter. The Adjustment is computed as follows:
--------------------------------------------------------------------------------
CUMULATIVE 36-MONTH PERFORMANCE
VERSUS THE INDEX(A) ADJUSTMENT AS A PERCENTAGE OF BASIC FEE (B)
--------------------------------------------------------------------------------
Trails by more than 9% - 75%
--------------------------------------------------------------------------------
Trails by 0% to 9% Linear decrease from 0% to - 75%
--------------------------------------------------------------------------------
Exceeds by 0% to 9% Linear increase from 0% to + 75%
--------------------------------------------------------------------------------
Exceeds by more than 9% + 75%
--------------------------------------------------------------------------------
(a) During the first thirty-six month (36) period, inception-to-date Fund
performance versus the Index for the same period will be utilized. Subject to
the transition rules provided below, the +/-9% hurdle rate illustrated in the
table above will be multiplied by
2
a fraction, the numerator being the months elapsed since inception and the
denominator being thirty-six (36).
(b) For purposes of the Adjustment calculation, the Basic Fee is calculated by
applying the above rate schedule against the average month-end net assets over
the same time period for which the performance is measured. Linear application
of the adjustment provides for an infinite number of results within the stated
range. Example: Cumulative 36-month performance of Fund versus the Index is
+7.2%. Accordingly, a performance fee Adjustment of +60% [(7.2% divided by 9.0%)
times 75% maximum)] of the Basic Fee, as calculated over the trailing 36-months,
would be due and payable.
4.1 TRANSITION RULE FOR CALCULATING ADVISOR'S COMPENSATION. The Adjustment
will not be fully operable until the Fund has been in operation for a full
36-months. Until that time, the following transition rules will apply (assuming
that the Fund begins operations on June 1, 2000):
JUNE 1, 2000 THROUGH MAY 31, 2001. Advisor compensation will be the Basic
Fee. No Adjustment will apply during this period.
JUNE 1, 2001 THROUGH MAY 31, 2003. Beginning June 1, 2001 the Adjustment
will take effect on a progressive basis with regards to the number of
months elapsed between June 1, 2000 and the quarter end for which the
Advisor fee is being computed. During this period, the Adjustment that has
been determined as provided above will be multiplied by a fraction. The
fraction's numerator will equal the number of months elapsed since June 1,
2000 and the denominator will be thirty-six (36).
ON AND AFTER JUNE 1, 2003. Commencing June 1, 2003, the Adjustment 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) FUND PERFORMANCE. The investment performance of the Fund for any
period, expressed as a percentage of the Fund's net asset value per share
at the beginning of the period will be the sum of: (i) the change in the
Fund's net asset value per share during the period; (ii) the value of the
Fund's cash distributions per share having an ex-dividend date occurring
within the period; (iii) the per share amount of capital gains taxes paid
or accrued during such period by the Fund for undistributed realized
long-term capital gains.
(b) 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
3
date occurring within the period made by companies whose securities
comprise the Index.
(c) 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 Trust 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 information about
changes in partners of the Adviser.
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 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. DURATION AND TERMINATION. This Agreement will become effective on June
1, 2000, and will continue in effect thereafter, only so long as such
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.
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
Trust 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,
4
and (iii) this Agreement may be terminated by Adviser on ninety days' written
notice to the Trust. 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 1940 Act.
9. 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.
10. 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 26th day of May, 2000.
ATTEST: VANGUARD FENWAY FUNDS
By Xxxxxxx X. Xxxxxxxxx By Xxxx X. Xxxxxxx
Chairman, CEO and President
ATTEST: XXXXXX INVESTMENT PARTNERS, INC.
By Xxx Xxxxx By Xxxxx Xxxxxx
5
