INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 29th day of September, 2000, between VANGUARD
VARIABLE INSURANCE FUND, a Delaware business trust (the "Trust"), and Grantham,
Mayo, Van Otterloo & Co. LLC, a Massachusetts limited liability company
("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"); and
WHEREAS, the Trust desires to retain the Adviser to render investment
advisory services to the series of shares of the Trust known as Vanguard
Variable Insurance Fund - Small Company Growth Portfolio (the "Fund"), 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 Trust hereby employs Adviser as investment
adviser to the Fund, on the terms and conditions set forth herein. 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 Adviser to manage the investment
and reinvestment of the assets of the Fund that the Fund's Board of Trustees
determines to assign to Adviser (referred to in this Agreement as the "GMO
Portfolio"), to continuously review, supervise and administer an investment
program for the GMO Portfolio, to determine in its discretion the securities to
be purchased or sold and the portion of the GMO Portfolio 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 Fund's officers and the Board of Trustees, 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 GMO
Portfolio, 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 pursuant to written policies and procedures
provided to Adviser. 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 annual percentage rate of 0.225%, to the average month-end net
assets of the GMO Portfolio for the quarter.
Subject to the transition rule described in Section 4.1 of this Agreement,
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 average net assets of the GMO Portfolio for
the 36-month period ending with the then-ended quarter, and the Adjustment will
change proportionately with the investment performance of the GMO Portfolio
relative to the investment performance of the Xxxxxxx 2000 Growth Index (the
"Index") for the same period. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE ADJUSTMENT AS A PERCENTAGE OF
OF GMO PORTFOLIO VS. INDEX(A) AVERAGE NET ASSETS(B)
------------------------------- -----------------------------
Trails Index -0.15%
Exceeds Index by 0% baseline to 3% Linear increase from -0.15% to 0%
Exceeds Index by 3% baseline to 6% Linear increase from 0% to +0.15%
Exceeds Index by more than 6% +0.15%
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(a) During the second through thirty-sixth month under this Agreement, the
Adjustment will be calculated using cumulative performance of the GMO
Portfolio and the Index from October 31, 2000 until the end of the
applicable quarter.
(b) For purposes of this calculation, the average net assets will be calculated
as average month-end net assets over the same time period for which
performance is measured. Linear application of the Adjustment provides for
an infinite number of results within the stated range. Example: If the
cumulative 36-month performance of the GMO Portfolio versus the Index is
+3.6%, an Adjustment of +0.03%* or [(0.6% / 3%) 0.15%] would apply. This
would be calculated as [(a / b) 0.15%], where a equals the percentage
amount by which the performance of the GMO Portfolio has exceeded the
applicable baseline percentage for the linear adjustment, and b equals the
size of the range over which the linear adjustment applies.
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* As rounded for purposes of this example. In practice, the calculation will
be extended to the eighth decimal point.
4.1. Transition Rule for Calculating Adviser's Compensation. The Adjustment
will not be fully operable until the close of the quarter ending December 31,
2003. Until that time, the following transition rules will apply:
(a) October 1, 2000 through September 30, 2001. The Adviser's
compensation will be the Basic Fee. No Adjustment will apply during this
period.
(b) October 1, 2001 through October 31, 2003. Beginning October 1,
2001, the Adjustment will take effect on a progressive basis with regards
to the number of months elapsed between October 31, 2000, and the end of
the quarter for which the Adviser's fee is being computed, subject to the
provisions of Section 4.2(e) of this Agreement. During this period, the
endpoints and size of the range over which a positive or negative
adjustment
applies and the corresponding maximum fee adjustment amount will be
multiplied by a fractional time-elapsed adjustment. The fraction will equal
the number of months elapsed since October 31, 2000, divided by thirty-six.
Example: Assume that Adviser's compensation is being calculated for the
quarter ended September 30, 2002 and that the cumulative performance of the
GMO Portfolio versus the Index for the applicable period is +2.5%. In this
case, an Adjustment of +0.03%* would apply. This would be calculated as
[(a/c)(+0.095%)], where a equals the percentage amount by which the
performance of the GMO Portfolio has exceeded the baseline percentage for
the linear adjustment and c equals the size of the adjusted range over
which the linear adjustment applies. The adjusted range is determined as
[(23/36) x 3%] to [(23/36) x 6%] = +1.91% to +3.82%. The size of the
adjustment range is 3.82% minus 1.91% = 1.91% = "c". The value of "a" is
2.5% minus 1.91% = +0.59%. Similarly, +0.095% is determined as
[(23/36)(+0.15%)].
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* As rounded for purposes of this example. In practice,
the calculation will be extended to the eighth decimal point.
(c) On and After November 1, 2003. Commencing November 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) GMO Portfolio Unit Value. The "GMO Portfolio unit value" will be
determined by dividing the total net assets of the GMO Portfolio by a given
number of units. Initially, the number of units in the GMO Portfolio will
equal a nominal value as determined by dividing initial assets by a unit
value of $22.64 on October 1, 2000. Subsequently, as assets are added to or
withdrawn from the GMO Portfolio, the number of units of the GMO Portfolio
will be adjusted based on the unit value of the GMO Portfolio on the day
such changes are executed. Any cash buffer maintained by the Fund outside
of the GMO Portfolio will neither be included in the total net assets of
the GMO Portfolio nor included in the computation of the GMO Portfolio unit
value.
(b) GMO Portfolio Performance. The GMO Portfolio's investment
performance for any period, expressed as a percentage of the "GMO Portfolio
unit value" at the beginning of such period, shall be the sum of: (i) the
change in the GMO Portfolio unit value during such period; (ii) the unit
value of the Fund's cash distributions from the GMO 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 paid or payable by the Fund on
undistributed realized long-term capital gains accumulated to the end of
the period by the GMO Portfolio, expressed as a percentage of the GMO
Portfolio's unit value at the beginning of the period. For this purpose,
the value of distributions of realized capital gains per unit of the GMO
Portfolio, of dividends per unit of the GMO Portfolio paid from investment
income, and of capital gains taxes per unit of the GMO Portfolio paid or
payable on undistributed realized long-term capital gains shall be treated
as reinvested in units of the GMO 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.
(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, shall 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 comprise the Index. For this
purpose, cash distributions on the securities which comprise the Index
shall be treated as reinvested in the Index at least as frequently as the
end of each calendar quarter following the payment of the dividend.
(d) Performance Computations. The foregoing notwithstanding, any
computation of the investment performance of the Fund 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 Sections 4 and 4.1 shall 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 balance sheet, 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 or
the Fund in any way or otherwise be deemed an agent of the Fund or 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
October 1, 2000, and will continue in effect until September 30, 2002, and
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.
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 Fund 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 29th day of September, 2000.
ATTEST: VANGUARD VARIABLE INSURANCE FUND
By /S/ Xxxxxxx X. Xxxxxx By /S/ Xxxx X. Xxxxxxx
Chairman, CEO and President
ATTEST: GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By /S/ Xxxxxxxx Xxxxx By /S/ Xxxxxxx Xxxxxxx
Portfolio Manager
