EXECUTION COPY
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this 6th day of February, 2003, between
VANGUARD VARIABLE INSURANCE 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 International
Portfolio (the "Portfolio"); and
WHEREAS, the Trust desires to retain the Adviser to render investment
advisory services to the Portfolio, 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 Portfolio 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 Portfolio 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 Portfolio
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 Portfolio with all
records concerning the activities of the Adviser that the Portfolio 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 Portfolio's
prospectus and Statement of Additional Information, any additional operating
policies or procedures that the Portfolio 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 Portfolio 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 (March, June, September and December) 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 multiplying an Annual Percentage Rate of
0.125% to the average month-end net assets of the BG Portfolio during
such fiscal quarter, and dividing the result by 4.
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 (0.125%) 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.)
2
================================================================================
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 March
31, 2006. Until that date, the following transition rules will apply:
(a) FEBRUARY 6, 2003 THROUGH DECEMBER 31, 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) JANUARY 1, 2004 THROUGH MARCH 31, 2006. Beginning January 1,
2004, the Performance Adjustment will take effect on a
progressive basis with regard to the number of months elapsed
between March 31, 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
Portfolio, as determined for a period commencing March 31, 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 April 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 March 31, 2003, divided by 36. (Fee Example
#2 in Appendix.)
3
(c) ON AND AFTER MARCH 31, 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
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
4
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 Portfolio 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 Portfolio 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 Portfolio in any way or otherwise be deemed an agent of the
Portfolio or the Trust.
8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to
protect the Adviser against any liability to the Portfolio 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.
5
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 Portfolio; 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 Portfolio.
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 Portfolio, 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 Portfolio. 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 Portfolio, at:
Vanguard Variable Insurance 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 Portfolio of the Trust.
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.
6
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 Portfolio, 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 Portfolio 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 VARIABLE INSURANCE 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 March 31, 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
----------------------------------------------------------------------------------------------------------------------
2004 1010 1011 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021
----------------------------------------------------------------------------------------------------------------------
2005 1022 1023 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033
----------------------------------------------------------------------------------------------------------------------
2006 1034 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 March 31, 2006 would be
$403,007.81 and is calculated as follows:
a. BASE FEE OF $323,437.50, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the BG Portfolio over the fiscal quarter ending March
31, 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 0.125%. 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 March 31, 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, ( = 0.125%)
Base Fee = ($1,035,000,000 X 0.125%) / 4 = $323,437.50
b. PERFORMANCE ADJUSTMENT OF +$79,570.31, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the BG Portfolio over the rolling 36-month
period applicable to the fiscal quarter ending March 31, 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, ( = 0.125%)
h = Average month-end net assets for the 36-months ended March 31, 2006, ( =
$1,018,500,000)
Performance Adjustment = ([25% X 0.125%] X $1,018,500,000) / 4 = +$79,570.31
c. An Adjusted Fee of $403,007.81, which is calculated as follows:
Adjusted Fee = i + j, where;
i = Base Fee, ( = $323,437.50)
j = Performance Adjustment, ( = $79,570.31)
Adjusted Fee = $323,437.50 + $79,570.31 = $403,007.81
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the BG Portfolio and the
Index are treated in a symmetric manner, such as in the example.
A-2
2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The
following example serves as a guide for the calculation of the Adjusted Fee
during the transition period.
Assume that the Adviser's compensation is being calculated for the fiscal
quarter ended September 30, 2004 and the month-end net assets of the BG
Portfolio over the 18-month period applicable to such fiscal quarter is as
follows:
======================================================================================================================
MONTH-END NET ASSETS OF BG PORTFOLIO ($ MILLION)
----------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
----------------------------------------------------------------------------------------------------------------------
2003 1001 1002 1003 1004 1005 1006 1007 1008 1009
----------------------------------------------------------------------------------------------------------------------
2004 1010 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 September 30, 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 March 31,
2006 would be $349,359.38 and is calculated as follows:
a. BASE FEE OF $317,812.50, 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 0.125%. 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 March 31, 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, ( = 0.125%)
Base Fee = ($1,017,000,000 X 0.125%) / 4 = $317,812.50
b. PERFORMANCE ADJUSTMENT OF +$31,546.88, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the BG portfolio over the performance period
(March 31, 2003 to September 30, 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 March 31, 2003 to September 30, 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 March 31, 2003 to September 30, 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, ( = 0.125%)
m = Average month-end net assets for the transition period ended September 30,
2004, (= $1,009,500,000)
Performance Adjustment = ([10% X 0.125%] X $1,009,500,000) / 4 = +$31,546.88
A-4
c. AN ADJUSTED FEE OF $349,359.38, WHICH IS CALCULATED AS FOLLOWS:
n + p = Adjusted Fee, where;
n = Base Fee, ( = $317,812.50)
p = Performance Adjustment, ( = $31,546.88)
Adjusted Fee = $317,812.50 + $31,546.88 = $349,359.38
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-5