INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this 1st day of April, 2000, between VANGUARD EQUITY
INCOME FUND, a Delaware business trust (the "Company"), and JOHN A. LEVIN & CO.,
INC. (the "Adviser"), an indirect wholly-owned subsidiary of Baker Fentress, a
closed-end investment company registered under the Investment Company Act of
1940 (the "1940 Act").
WHEREAS, the Company is an open-end, diversified management investment
company registered under the 1940 Act, as amended;
WHEREAS, the Company offers a series of shares known as Vanguard Equity
Income Fund (the "Fund"); and
WHEREAS, the Company desires to retain Adviser to render investment
advisory services to certain assets of the Fund which the Board of Trustees of
the Company determines to assign to Adviser (referred to in this Agreement as
the "Levin 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 Company hereby employs Adviser as investment
adviser, on the terms and conditions set forth herein, for the assets of the
Fund that the Board of Trustees determines to assign to Adviser. 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 Company employs Adviser to manage the investment
and reinvestment of the assets of the Levin 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 Company, and in compliance with the
objectives, policies and limitations set forth in the Fund's prospectus, any
additional operating policies or
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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 Levin
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 of the Company pursuant to written policies
and procedures provided to the 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 following annual percentage rates, to the average month-end net
assets of the Levin Portfolio for the quarter:
.40% on the first $100 million of net assets;
.25% on the next $200 million of net assets;
.30% on the next $200 million of net assets;
.20% on the next $500 million of net assets;
.10% on net assets in excess of $1 billion.
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 assets managed by Levin. The investment
performance will be based on the cumulative return over a trailing 36-month
period ending with the applicable quarter, relative to the cumulative total
return, as detailed in Section 4.2(c), of the Standard and Poor's 500 Composite
Stock Price Index (the "Benchmark") for the same time period. The Adjustment
applies as follows:
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CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A
LEVIN PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
----------------------------- ------------------------
Trails by 0% or more -.40% x Basic Fee
Exceeds by more than 0% but less than 3% -.20% x Basic Fee
Exceeds by 3% through 6% 0.00% x Basic Fee
Exceeds by more than 6% but less than 9% +.20% x Basic Fee
Exceeds by 9% or more +.40% x Basic Fee
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*For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate against the average assets over the same time period which the
performance is measured.
4.1. 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 Levin
Portfolio for any period, expressed as a percentage of the "Levin Portfolio
unit value" per share at the beginning of such 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) "LEVIN PORTFOLIO UNIT VALUE." The "Levin Portfolio unit value"
will be determined by dividing the total net assets of the Levin Portfolio
by a given number of units. On the initial date of the agreement, the
number of units in the Levin Portfolio will equal the total shares
outstanding of the Fund. Subsequently, as assets are added to or withdrawn
from the Levin Portfolio, the number of units of the Levin Portfolio will
be adjusted based on the unit value of the Levin Portfolio on the day such
changes are executed. Any cash buffer maintained by the Fund outside of the
Levin Portfolio shall neither be included in the total net assets of the
Levin Portfolio nor included in the computation of the Levin Portfolio unit
value.
(C) BENCHMARK PERFORMANCE. The investment record of the Benchmark for
any period will be obtained from an independent source at the end of each
applicable quarter. The calculation will be based on the thirty-six month
period ending with the applicable quarter and will be gross of applicable
costs and expenses.
(D) EFFECT OF TERMINATION. In the event of termination of this
Agreement, the fees provided in Sections 4.0 and 4.1 will be computed on
the basis of the period ending on the
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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 Company 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 Company 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 Company or
the Fund in any way or otherwise be deemed an agent of the Company or the Fund.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect Adviser against any liability to the Company, the Fund or their
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 April
1, 2000, and will continue in effect thereafter only so long as such continuance
is approved at least annually by votes of the Company'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
Company 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 Company. 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.
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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 30th day of March, 2000.
ATTEST: VANGUARD EQUITY INCOME FUND
By /S/ Melissa Nassar By /S/ John J. Brennan
Chairman, CEO and President
ATTEST: JOHN A. LEVIN & CO., INC.
By /S/ Norris Nissim By /S/ John A. Levin
Chairman, CEO and President
