INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of March, 2000, between VANGUARD
WELLINGTON FUND, a Delaware business trust (the "Fund"), and Wellington
Management Company, LLP, a Massachusetts limited liability partnership (the
"Adviser").
WHEREAS, the Fund is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund 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 Fund hereby employs the Adviser as
investment adviser, on the terms and conditions set forth herein, for the Fund.
The 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 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 Fund'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 same Fund Group. The Adviser will promptly
communicate to the Fund's officers and Board of Trustees such information
relating to portfolio transactions as they may reasonably request.
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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, a Basic Fee calculated by applying a
quarterly rate, based on the following annual percentage rates, to the average
month-end net assets for the quarter:
.100% on the first $1 billion of net assets;
.050% on the next $2 billion of net assets;
.040% on the next $7 billion of net assets;
.030% on the net assets of the Fund in excess of $10 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 Fund relative to the investment performance of the
"Benchmark," of which 65% will comprise of the Standard and Poors 500 Composite
Stock Price Index (the "Stock Index) and 35% will comprise the Lehman Brothers
Corporate A or Better Bond Index (the "Bond Index"). The investment performance
of the Fund 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 Benchmark for the same time period. The Adjustment applies as
follows:
CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
FUND PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
---------------------------- --------------------------
Trails by -6% or more -0.30 x Basic Fee
Trails by more than -3% up to -6% -0.15 x Basic Fee
Trails/exceeds from -3% through 3% 0.00 x Basic Fee
Exceeds by more than 3% but less than 6% +0.15 x Basic Fee
Exceeds by 6% or more +0.30 x Basic Fee
----------------------------
*For purposes of determining the fee adjustment calculation, the quarterly
rate is applied against the net assets of the Fund averaged over the same time
period for which the performance is measured.
4.1. TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Benchmark
will not be fully operable as the sole performance index used to determine the
Adviser's Adjustment until the quarter ending February 28, 2003. Until that
date, the Adviser's Adjustment will be determined by linking the investment
performance of the Benchmark and that of the "Prior Benchmark," 65% of which
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will comprise of the Stock Index and 35% of which will comprise of the Lehman
Brothers Long-Term Corporate AA or Better Bond Index (the "Prior Bond Index") as
follows:
1. QUARTER ENDING MAY 31, 2000. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Benchmark for the eleven
quarters ending February 29, 2000, with that of the Benchmark for the quarter
ending May 31, 2000.
2. QUARTER ENDING AUGUST 31, 2000. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
ten quarters ending February 29, 2000, with that of the Benchmark for the two
quarters ending August 31, 2000.
3. QUARTER ENDING NOVEMBER 30, 2000. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
nine quarters ending February 29, 2000, with that of the Benchmark for the three
quarters ending November 30, 2000.
4. QUARTER ENDING FEBRUARY 28, 2001. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for
eight quarters ending February 29, 2000, with that of the Benchmark for the four
quarters ending February 28, 2001.
5. QUARTER ENDING MAY 31, 2001. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Benchmark for the seven
quarters ending February 29, 2000, with that of the Benchmark for the five
quarter ending May 31, 2001.
6. QUARTER ENDING AUGUST 31, 2001. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
six quarters ending February 29, 2000, with that of the Benchmark for the six
quarter ending August 31, 2001.
7. QUARTER ENDING NOVEMBER 30, 2001. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
five quarters ending February 29, 2000, with that of the Benchmark for the seven
quarters ending November 30, 2001.
8. QUARTER ENDING FEBRUARY 28, 2002. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for four
quarters ending February 29, 2002, with that of the Benchmark for the eight
quarters ending February 28, 2002.
9. QUARTER ENDING MAY 31, 2002. The Adviser's Adjustment will be determined
by linking the investment performance of the Prior Benchmark for the three
quarters ending February 29, 2000, with that of the Benchmark for the nine
quarter ending May 31, 2002.
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10. QUARTER ENDING AUGUST 31, 2002. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
two quarters ending February 29, 2000, with that of the Benchmark for the ten
quarter ending August 31, 2002.
11. QUARTER ENDING NOVEMBER 30, 2002. The Adviser's Adjustment will be
determined by linking the investment performance of the Prior Benchmark for the
one quarter ending February 29, 2000, with that of the Benchmark for the eleven
quarters ending November 30, 2002.
12. QUARTER ENDING FEBRUARY 28, 2003. The Benchmark is fully operable.
4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
1. 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.
2. BENCHMARK AND INDEX PERFORMANCE.
(a) BENCHMARK. The investment record of the Benchmark for any period,
expressed as a percentage of the Benchmark at the beginning of such period, will
be the sum of: (i) the change in the level of the Benchmark during the period;
(ii) the value of the interest accrued or paid on the bonds included in the
Benchmark, assuming the reinvestment of such interest on a monthly basis.
Computations of the two components of the Benchmark will be made at the
beginning of each quarter, based on the allocation set forth in this Agreement.
i. STOCK INDEX. The investment record of the Stock Index for any period,
expressed as a percentage of the Stock Index at the beginning of such period,
will be the sum of: (i) the change in the level of the Stock Index during the
period; (ii) the value, computed consistently with the Stock Index, of cash
distributions having an ex-dividend date occurring within the period made by
companies whose securities comprise the Stock Index.
ii. BOND INDEX. The investment record of the Bond Index for the period,
expressed as a percentage of the Bond Index at the beginning of such period,
will be the sum of: (i) the change in the level of the Benchmark during the
period; (ii) the value of the interest accrued or paid on the bonds included in
the Benchmark, assuming the reinvestment of such interest on a monthly basis.
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(b) PRIOR BENCHMARK. The investment record of the Prior Benchmark for any
period will be computed in the same manner as that of the Benchmark; provided,
however, that the Prior Bond Index will be substituted for the Bond 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 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 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 Fund 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.
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 March
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.
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.
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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.
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 ___ day of _______, 2000.
ATTEST: VANGUARD WELLINGTON FUND
/S/ Melissa Nassar /S/ John J. Brennan
By ________________________ By ________________________________
Chairman, CEO and President
ATTEST: WELLINGTON MANAGEMENT COMPANY, LLP.
/S/ Sara Lou Sherman /S/ John H. Gooch
By _________________________ By __________________________________
