EXECUTION COPY
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 6th day of February, 2003, between
VANGUARD WORLD FUNDS, a Delaware statutory trust (the "Trust"), and ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ OVERSEAS LTD, a corporation organized under the laws of Scotland, United
Kingdom (the "Adviser").
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 Growth 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, in consideration of the mutual promises and undertakings set
forth in this "Agreement," the Trust and the Adviser hereby agree as follows:
1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser as
investment adviser, 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 Adviser from
time to time (referred to in this Agreement as the "BG Portfolio"). As of the
date of this Agreement, the BG Portfolio will consist of the portion of the
assets of the Fund that the Board of Trustees has determined to assign to the
Adviser, as communicated to the Adviser 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 Adviser. 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 BG Portfolio; to continuously
review, supervise, and administer an investment program for the BG 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 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 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 Adviser in writing, and applicable
laws and regulations. The Adviser 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.
3. SECURITIES TRANSACTIONS. The Adviser is authorized to select the brokers
or dealers that will execute purchases and sales of securities for the BG
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 or its staff, and other applicable law, the Adviser 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 Adviser 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 Adviser'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 Adviser agrees to comply with any directed brokerage or other
brokerage arrangements that the Fund communicates to the Adviser in writing. The
Adviser will promptly communicate to the Trust's officers and the Board of
Trustees any information relating to the portfolio transactions the Adviser has
directed on behalf of the BG Portfolio as such officers or the Board may
reasonably request.
4. COMPENSATION OF ADVISER. For services to be rendered by the Adviser as
provided in this Agreement, the Fund will pay to the Adviser an asset-based
investment management fee (the "Base Fee") plus a performance-based adjustment
to the Base Fee (the "Performance Adjustment"), as further described in this
Section 4. The Base Fee plus the Performance Adjustment (collectively, the
"Adjusted Fee") will be paid by the Fund to the Adviser on the Fund's fiscal
quarter ends (February, May, August and November) in arrears, as further
described in this Section 4.
4.1. CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter of
the Fund is calculated by applying the following Annual Percentage
Rate Schedule (shown below) to the average of the month-end net assets
of the BG Portfolio during such fiscal quarter, and dividing the
result by 4.
---------------------------------------------------------------------
ANNUAL PERCENTAGE RATE SCHEDULE
---------------------------------------------------------------------
AVERAGE MONTH-END ANNUAL PERCENTAGE
NET ASSETS RATE
---------------------------------------------------------------------
On the first $1.5 billion 0.150%
---------------------------------------------------------------------
On the next $2.0 billion 0.125%
---------------------------------------------------------------------
On assets over $3.5 billion 0.100%
---------------------------------------------------------------------
2
4.2 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 Schedule applied to the average of the month-end net
assets of the Fund over the previous 36 months, and dividing the
result by four. The Adjustment Percentage for each fiscal quarter of
the Fund shall be determined by applying the following Performance
Adjustment Schedule to the cumulative performance of the BG Portfolio
relative to the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Capital International Europe,
Australasian, Far East Index (the "Index") over the rolling 36-month
period applicable to such fiscal quarter. (See Fee Example #1 in
Appendix.)
--------------------------------------------------------------------------------
PERFORMANCE ADJUSTMENT SCHEDULE
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OF BG PORTFOLIO
VS. ADJUSTMENT PERCENTAGE
INDEX OVER APPLICABLE 36-MONTH PERIOD
--------------------------------------------------------------------------------
Less than -9% -50%
--------------------------------------------------------------------------------
From -9% up to and including 0% Linear decrease from -50% to 0%
--------------------------------------------------------------------------------
Greater than 0% and up to and including +9% Linear increase from 0% to +50%
--------------------------------------------------------------------------------
More than +9% +50%
--------------------------------------------------------------------------------
4.3. CALCULATION OF ADJUSTED FEE FOR PERIODS BEFORE FEBRUARY 6, 2003.
Notwithstanding any other provision of this Agreement, the Adviser
shall receive no compensation hereunder with respect to any period of
time that begins prior to February 6, 2003. Accordingly, the first
Adjusted Fee payable hereunder shall be pro rated as necessary to
account for the actual duration of time during the first fiscal
quarter of the Fund for the 2003 calendar year that this Agreement was
effective, and all subsequent calculations of the Adjusted Fee payable
hereunder shall be appropriately adjusted to ensure that the Adviser
receives no compensation hereunder with respect to any period of time
that begins prior to February 6, 2003.
4.4. TRANSITION RULES FOR CALCULATING ADVISER'S COMPENSATION. The
Performance Adjustment will not be fully incorporated into the
determination of the Adjusted Fee until the fiscal quarter ended
February 28, 2006. Until that date, the following transition rules
will apply:
(a) February 6, 2003 through November 30, 2003. 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) December 1, 2003 through February 28, 2006. Beginning December 1,
2003, the Performance Adjustment will take effect on a
progressive basis with regard to the number of months elapsed
between February 28, 2003, 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 BG
3
Portfolio, as determined for a period commencing February 28,
2003, 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 BG
Portfolio and the Index for a period commencing March 1, 2003 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 February 28, 2003, divided by
36. (See Fee Example #2 in Appendix.)
(c) ON AND AFTER FEBRUARY 28, 2006. The Adjusted Fee will be equal to
the Base Fee plus the Performance Adjustment.
4.5. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
(a) BG PORTFOLIO UNIT VALUE. The "BG Portfolio unit value" shall be
determined by dividing the total net assets of the BG Portfolio
by a given number of units. The number of units in the BG
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 BG Portfolio,
the number of units of the BG Portfolio shall be adjusted based
on the unit value of the BG Portfolio on the day such changes are
executed.
(b) BG PORTFOLIO PERFORMANCE. The investment performance of the BG
Portfolio for any period, expressed as a percentage of the BG
Portfolio unit value at the beginning of the period, will be the
sum of: (i) the change in the BG Portfolio unit value during such
period; (ii) the unit value of the Fund's cash distributions from
the BG 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 by
the BG Portfolio, expressed as a percentage of the BG Portfolio
unit value at the beginning of such period. For this purpose, the
value of distributions of realized capital gains per unit of the
BG Portfolio, of dividends per unit of the BG Portfolio paid from
investment income, and of capital gains taxes per unit of the BG
Portfolio paid or payable on undistributed realized long-term
capital gains shall be treated as reinvested in units of the BG
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 BG
Portfolio unit value will be determined net of all fees and
expenses of the Fund attributable to the BG Portfolio. Thus, the
performance of the BG Portfolio will be net of all fees and
4
expenses of the Fund attributable to the BG 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 ▇▇▇▇▇▇
▇▇▇▇▇▇▇ Capital International Inc.
(d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the BG 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 Adviser 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.
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, but not limited to,
information about changes in partners of the Adviser (to the extent applicable).
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, without
limitation, 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.
5
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; TERMINATION; NOTICES; AMENDMENT. This Agreement will become
effective on the date hereof and will continue in effect for a period of three
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.
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 Adviser, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the 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 as follows:
If to the Fund, at:
Vanguard World Funds - Vanguard International Growth Fund
▇.▇. ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Telephone: ▇▇▇-▇▇▇-▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
If to the Adviser, at:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Overseas Ltd
▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Telephone: ▇▇ ▇▇▇ ▇▇▇ ▇▇▇▇
Facsimile: 44 131 222 4496
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.
6
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.
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. CONFIDENTIALITY. The Adviser shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
relating directly or indirectly to the Fund, the Trust, or Vanguard and shall
not disclose any such information to any person other than the Trust, the Board
of Directors of the Trust, Vanguard), and any director, officer, or employee of
the Trust or Vanguard, except (i) with the prior written consent of the Trust,
(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 Adviser, or (iii) for information that is publicly
available other than due to disclosure by the Adviser or its affiliates or
becomes known to the Adviser from a source other than the Trust, the Board of
Directors of the Trust, or Vanguard.
12. PROXY POLICY. The Adviser 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 Adviser with respect to the BG
Portfolio.
13. 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-interest law principles thereof) of
the State of Delaware applicable to contracts made and to be performed in that
state.
7
IN WITNESS WHEREOF, the parties hereto have caused this
Investment Advisory Agreement to be executed as of the date first set forth
herein.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ OVERSEAS LTD VANGUARD WORLD FUNDS
----------------------------------- -------------------------------------
Signature Date Signature Date
----------------------------------- -------------------------------------
Print Name Title Print Name Title
8
APPENDIX
1. FEE EXAMPLE #1 - ADJUSTED FEE CALCULATION: The following example serves as a
guide for the calculation of the Adjusted Fee.
Assume the Adjusted Fee for the fiscal quarter ending February 28, 2006 is being
calculated, the transition rules (described in Section 4.3) are not in effect,
and the month-end net assets of the BG Portfolio over the rolling 36-month
period applicable to such fiscal quarter is as follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF BG PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
----------------------------------------------------------------------------------------------------------------------
2003 1001 1002 1003 1004 1005 1006 1007 1008 1009 1010
----------------------------------------------------------------------------------------------------------------------
2004 1011 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022
----------------------------------------------------------------------------------------------------------------------
2005 1023 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033 1034
----------------------------------------------------------------------------------------------------------------------
2006 1035 1036
----------------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the BG Portfolio over the rolling
36-month period applicable to such fiscal quarter is +24.5%, and the cumulative
performance of the Index over such period is +20.0%. The Adjusted Fee payable by
the Fund to the Adviser for the fiscal quarter ending February 28, 2006 would be
$483,609.38 and is calculated as follows:
A. BASE FEE OF $388,125.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the BG Portfolio over the fiscal quarter ending February
28, 2006 ($1,035,000,000), when applied to the Annual Percentage Rate Schedule,
corresponds to Average Month-End Net Assets of $1.5 billion or less, and an
Annual Percentage Rate of 0.150%. 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 February 28,
2006, calculated as follows:
($1,034,000,000 + $1,035,000,000+ $1,036,000,000) / 3 = $1,035,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.150%)
Base Fee = ($1,035,000,000 X 0.150%) / 4 = $388,125.00
B. PERFORMANCE ADJUSTMENT OF +$95,484.38, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the BG Portfolio over the 36-month period
applicable to the fiscal quarter ending February 28, 2006 is $1,018,500,000. The
excess return of the BG Portfolio (+24.5%) over the Index (+20.0%) over such
period is +4.5%. An excess return of +4.5%, when applied to the Performance
Adjustment Schedule, corresponds to a relative performance of Greater than 0%
and up to and including +9%, which corresponds to an Adjustment Percentage of
25%, calculated as follows:
A-1
Adjustment Percentage = ([c / d]) X e, where;
c = Excess return over the performance period, ( = +4.5%)
d = Maximum excess return for appropriate performance range, ( = +9.0%)
e = Maximum Adjustment Percentage for appropriate performance range, (= +50%)
Adjustment Percentage = ([4.5%/9.0%]) X 50% = +25%
Therefore, the Performance Adjustment = ([f X g] X h) / 4, where;
f = Adjustment Percentage, ( = +25%)
g = Annual Percentage Rate applied to average month end net assets, ( = 0.150%)
h = Average month-end net assets for the 36-months ended
February 28, 2006, ( = $1,018,500,000)
Performance Adjustment = ([25% X 0.150%] X $1,018,500,000) / 4 = +$95,484.38
c. An Adjusted Fee of $483,609.38, which is calculated as follows:
Adjusted Fee = i + j, where;
i = Base Fee, ( = $388,125.00)
j = Performance Adjustment, ( = $95,484.38)
Adjusted Fee = $388,125.00 + $95,484.38 = $483,609.38
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the BG Portfolio and the
Index are treated in a symmetric manner, such as in the example.
A-2
2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The
following example serves as a guide for the calculation of the Adjusted Fee
during the transition period.
Assume that the Adviser's compensation is being calculated for the fiscal
quarter ended August 31, 2004 and the month-end net assets of the BG Portfolio
over the 18-month period applicable to such fiscal quarter is as follows:
----------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF BG PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
----------------------------------------------------------------------------------------------------------------------
2003 1001 1002 1003 1004 1005 1006 1007 1008 1009 1010
----------------------------------------------------------------------------------------------------------------------
2004 1011 1012 1013 1014 1015 1016 1017 1018
----------------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the BG Portfolio over the 18-month
period applicable to the August 31, 2004 fiscal quarter is +11.8%, and the
cumulative performance of the Index over such period is +10.0%. Thus, the excess
return of the BG portfolio over the applicable period is +1.80%. The Adjusted
Fee payable by the Fund to the Adviser for the fiscal quarter ending February
28, 2006 would be $419,231.25 and is calculated as follows:
A. BASE FEE OF $381,375.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the BG Portfolio over the fiscal quarter ending August
31, 2004 ($1,017,000,000), when applied to the Annual Percentage Rate Schedule,
corresponds to Average Month-End Net Assets of $1.5 billion or less, and an
Annual Percentage Rate of 0.150%. 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
February 28, 2006, calculated as follows: ($1,016,000,000 +
$1,017,000,000 + $1,018,000,000) / 3 = $1,017,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.150%)
Base Fee = ($1,017,000,000 X 0.150%) / 4 = $381,375.00
B. PERFORMANCE ADJUSTMENT OF +$37,856.25, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the BG portfolio over the performance period
(February 28, 2003 to August 31, 2004) are $1,009,500,000). The excess return of
the BG portfolio (+11.8%) over the Index (+10.0%) over such period is +1.80%. An
excess return of +1.80%, when applied to the Performance Adjustment Schedule,
corresponds to a relative performance of Greater than 0% and up to and including
+9%, which corresponds to an Adjustment Percentage of +10%, calculated as
follows:
A-3
Adjustment Percentage = ([c / d] X i), where;
c = Percentage amount by which the performance of the Fund
has exceeded the Index, ( = +1.80%)
d = Size of the adjusted range over which the linear
adjustment applies, determined as follows:
adjusted range = [(e/f) X g] to [(e/f) X h] = d
e = Number of months elapsed from February 28, 2003 to August 31, 2004 (= 18)
f = Number of months in full rolling performance period (= 36)
g = Minimum excess return for appropriate performance range (= 0.0%)
h = Maximum excess return for appropriate performance range (= +9.0%)
d = [(18/36) X 0.0%] to [(18/36) X +9.0%] = (0.0% to +4.5%),
therefore, the size of adjustment range = (+4.5% - 0.0%) = +4.5% = d
i = The Maximum Adjustment Percentage for the transition period,
which is determined as follows:
Maximum Adjustment Percentage = [(e / f) X j] = i
e = Number of months elapsed from February 28, 2003 to August 31, 2004 (= 18)
f = Number of months in full rolling performance period (= 36)
j = Maximum Adjustment Percentage for the appropriate
performance range (= +50%)
Maximum Adjustment Percentage for transition period =
[(18/36) X 50%) = +25% = i
Adjustment Percentage = ([c / d] X i) = ([1.8%/4.5%] X 25%) = +10.0%
Therefore, the Performance Adjustment is equal to ([k X l] X m) / 4, where;
k = Adjustment Percentage, ( = +10%)
l = Annual Percentage Rate applied to average month-end net assets, ( = 0.150%)
m = Average month-end net assets for the
transition period ended August 31, 2004, ( = $1,009,500,000)
Performance Adjustment = ([10% X 0.150%] X $1,009,500,000) / 4 = +$37,856.25
A-4
C. AN ADJUSTED FEE OF $419,231.25, WHICH IS CALCULATED AS FOLLOWS:
n + p = Adjusted Fee, where;
n = Base Fee, ( = $381,375.00)
p = Performance Adjustment, ( = $37,856.25)
Adjusted Fee = $381,375.00 + $37,856.25 = $419,231.25
D. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the BG Portfolio and the
Index are treated in a symmetric manner, such as in the example.
A-5