INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this October 22, 2004, between Vanguard
Horizon Funds, a Delaware statutory trust (the "Trust"), and Acadian Asset
Management, Inc. (the "Advisor").
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 Global
Equity Fund (the "Fund"); and
WHEREAS, the Trust desires to retain the Advisor to render investment
advisory services to the Fund, and the Advisor 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 Advisor hereby agree as follows:
1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as
investment advisor, 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 Advisor from
time to time (referred to in this Agreement as the "Acadian Portfolio"). As of
the date of this Agreement, the Acadian Portfolio will consist of the portion of
the assets of the Fund that the Board of Trustees has determined to assign to
the Advisor, as communicated to the Advisor 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 Advisor. The Advisor accepts such employment and agrees to
render the services herein set forth, for the compensation herein provided.
2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the
investment and reinvestment of the assets of the Acadian Portfolio; to
continuously review, supervise, and administer an investment program for the
Acadian 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 Advisor 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 Advisor 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 Advisor in
writing, and applicable laws and regulations. The Advisor 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 Advisor is authorized to select the brokers
or dealers that will execute purchases and sales of securities for the Acadian
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 (the "SEC") or its staff, and other applicable law, the Advisor is
permitted, but is not required, 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 Advisor 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 Advisor'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 Advisor agrees
to use its best efforts to comply with any directed brokerage or other brokerage
arrangements that the Fund communicates to the Advisor in writing. The Fund
acknowledges that directed brokerage may result in the Fund paying higher
commissions than would be the case if the Advisor were able to select brokers
freely. Directed brokerage in many cases limits the Advisor's ability to
negotiate commissions for the Fund and its ability to aggregate orders and may
result in an inability to obtain volume discounts or best execution for the Fund
in some transactions. The Advisor may manage other portfolios and expects that
the Fund and other portfolios it manages will, from time to time, purchase or
sell the same securities. The Advisor may aggregate orders for the purchase or
sale of securities on behalf of the Fund with orders on behalf of other
portfolios the Advisor manages, to the extent consistent with the Advisor's duty
to seek best execution and to ensure the fair and equitable allocations of
aggregated securities. Securities purchased or proceeds of securities sold
through aggregated orders will be allocated to the account of each portfolio
managed by the advisor that bought or sold such securities at the average
execution price. If less than the total of the aggregated orders is executed,
the securities or proceeds will generally be allocated pro rata among the
participating portfolios in proportion to their planned participation in the
aggregated orders. If the securities or proceeds are not allocated pro rata
among the participating portfolios, the Advisor will allocate such securities or
proceeds in a manner that is fair and equitable to all participating portfolios,
and will record the basis of such non-pro rata allocation in writing or in
electronic form and maintain such records in a manner consistent with applicable
recordkeeping requirements under the Investment Company Act of 1940 and the
Investment Advisers Act of 1940. The Advisor will promptly communicate to the
Trust's officers and the Board of Trustees any information relating to the
portfolio transactions the Advisor has directed on behalf of the Acadian
Portfolio as such officers or the Board may reasonably request.
4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor
pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor
agrees to accept as full compensation therefore, an investment advisory fee at
the rate specified in Schedule A to this Agreement. The fee will be calculated
based on annual percentage rates applied to the average month-end net assets of
the Acadian Portfolio and will be paid to the Advisor quarterly.
5. REPORTS. The Fund and the Advisor 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 Advisor. The Fund acknowledges receipt of Part II of the
Advisor's Form ADV.
6. COMPLIANCE.
6.1. COMPLIANCE WITH APPLICABLE LAW AND BOARD REQUIREMENTS. The Advisor
agrees to comply with all Applicable Law and all policies, procedures or
reporting requirements that the Board of Trustees of the Trust reasonably
adopts and communicates to the Advisor in writing, including, without
limitation, any such policies, procedures or reporting requirements
relating to soft dollar or directed brokerage arrangements.
6.2. DISCLOSURE OF COMPLIANCE MATTERS. If the Advisor receives any written
or other communication concerning or constituting a material Compliance
Matter, then the Advisor shall provide the Trust a written summary of the
material facts and circumstances concerning such material Compliance Matter
within five (5) calendar days of the earlier of the date on which such
material Compliance Matter was received by the Advisor, or the date on
which the general counsel's office of the Advisor obtained actual knowledge
of such material Compliance Matter. The Advisor shall provide the Trust
with a written summary of any material changes in the facts or
circumstances concerning any material Compliance Matter within (5) calendar
days of the occurrence of such changes. The written summary may exclude
information that is specifically prohibited from disclosure to third
parties by a written confidentiality agreement to which the Advisor is
party or by a fiduciary duty of confidentiality applicable to the Advisor;
provided, however, that the written summary shall be written in a manner
that continues to include a summary of the material facts and circumstances
concerning the Compliance Matter.
6.3. CERTAIN DEFINITIONS. "Applicable Law" means (i) the "federal
securities laws" as defined in Rule 38a-1(e)(1) under the 1940 Act, as
amended from time to time, and (ii) any and all other laws, rules, and
regulations, whether foreign or domestic, in each case applicable at any
time and from time to time to the investment management operations of the
Advisor. "Compliance Matter" means any written or other communication sent
to the Advisor by any foreign, federal or state agency or regulatory
authority or any self-regulatory authority in connection with any of the
following: (i) the Advisor's compliance with, or failure to comply with,
Applicable Law as they relate to the Advisor's investment management
operations; (ii) the business or affairs of the Advisor or any current or
former client of the Advisor as they relate to the Advisor's investment
management operations; or (iii) compliance by any person other than the
Advisor with, or such person's failure to comply with, Applicable Law as
they relate to the Advisor's investment management operations.
7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not to be
deemed exclusive, and the Advisor will be free to render similar services to
others so long as its services to the Fund are not impaired thereby. The Advisor
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.
8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed to
protect the Advisor 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 with respect to the Advisor's management of the
Acadian Portfolio 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 two
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 affected 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 Advisor, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the Advisor 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 Horizon Funds - Vanguard Global Equity Fund
X.X. Xxx 0000
Xxxxxx Xxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
If to the Advisor, at:
Acadian Asset Management, Inc.
Xxx Xxxx Xxxxxx Xxxxxx
Xxxxxx, XX 00000
Attention: Xxxxxxxxx X. Xxxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
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.
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 Advisor 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 Advisor, or (iii) for information that is publicly
available other than due to disclosure by the Advisor or its affiliates or
becomes known to the Advisor from a source other than the Trust, the Board of
Directors of the Trust, or Vanguard.
12. PROXY POLICY. The Advisor 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 Advisor with respect to the Acadian
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-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
IN WITNESS WHEREOF, the parties hereto have caused this Investment
Advisory Agreement to be executed as of the date first set forth herein.
Acadian Vanguard Horizon Funds
/s/Xxxxxxxxx R Xxxxx 9/29/04 /s/ Xxxx X. Xxxxxxx 9/28/04
--------------------- --------- ---------------------- ---------
Signature Date Signature Date
------------------------------ ---------------------- ---------
Print Name Date Print Name Date
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SCHEDULE A
Pursuant to Section 4 of the Agreement, the Fund shall pay the Advisor
compensation as follows:
13.1.CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter of
the Fund is calculated by multiplying an Annual Percentage Rate (shown
below) to the average month-end net assets of the Acadian Portfolio
during such fiscal quarter, and dividing the result by 4. The Fund's
fiscal quarter ends are the months ending March, June, September, and
December.
---------------------------------------------------------------------
ANNUAL PERCENTAGE RATE SCHEDULE
---------------------------------------------------------------------
AVERAGE MONTH-END ANNUAL PERCENTAGE RATE
NET ASSETS
---------------------------------------------------------------------
On the first $1.0 billion 0.240%
On the next $1.5 billion 0.200%
On the next $1.5 billion 0.160%
On assets over $4.0 billion 0.100%
------------------------------------- -------------------------------
13.2.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 applied to the average of the month-end net assets of
the Acadian Portfolio over the previous 36-months, and dividing the
result by four. The Adjustment Percentage for each fiscal quarter of
the Acadian Portfolio shall be determined by applying the following
Performance Adjustment Schedule to the cumulative performance of the
Acadian Portfolio relative to the Xxxxxx Xxxxxxx Capital International
- All Country Index (the "Index") over the rolling 36-month period
applicable to such fiscal quarter. (See Fee Example #1.)
--------------------------------------------------------------------------------
PERFORMANCE ADJUSTMENT SCHEDULE
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OF ACADIAN PORTFOLIO
VS. ADJUSTMENT PERCENTAGE
INDEX OVER APPLICABLE 36-MONTH PERIOD
--------------------------------------------------------------------------------
More than +9% +50%
--------------------------------------------------------------------------------
Greater than 0% up to and including +9% Linear increase between 0% to +50%
--------------------------------------------------------------------------------
From -9% up to and including 0% Linear decrease between -50% to 0%
--------------------------------------------------------------------------------
Less than -9% -50%
--------------------------------------------------------------------------------
13.3.TRANSITION RULES FOR CALCULATING ADVISOR'S COMPENSATION. The
Performance Adjustment will not be fully incorporated into the
determination of the Adjusted Fee until the fiscal quarter ended
December 31, 2007. Until that date, the following transition rules
will apply:
(a) OCTOBER 22, 2004 THROUGH SEPTEMBER 30, 2005. 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.
A-1
(B) OCTOBER 1, 2005 THROUGH DECEMBER 31, 2007. Beginning October 1,
2005, the Performance Adjustment will take effect on a progressive
basis with regard to the number of months elapsed between December 31,
2004, 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 Acadian Portfolio, as determined for a
period commencing January 1, 2005, 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 Acadian Portfolio and the Index for a period
commencing January 1, 2005 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 December 31, 2004, divided by 36.
(See Fee Example #2.)
(c) ON AND AFTER DECEMBER 31, 2007. The Adjusted Fee will be equal to
the Base Fee plus the Performance Adjustment.
13.4.OTHER SPECIAL RULES RELATING TO ADVISOR'S COMPENSATION. The following
special rules will also apply to the Advisor's compensation:
(a) ACADIAN PORTFOLIO UNIT VALUE. The "Acadian Portfolio unit value"
shall be determined by dividing the total net assets of the Acadian
Portfolio by a given number of units. The number of units in the
Acadian 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 Acadian Portfolio,
the number of units in the Acadian Portfolio shall be adjusted based
on the unit value of the Acadian Portfolio on the day such changes are
executed.
(b) ACADIAN PORTFOLIO PERFORMANCE. The investment performance of the
Acadian Portfolio for any period, expressed as a percentage of the
Acadian Portfolio unit value at the beginning of the period, will be
the sum of: (i) the change in the Acadian Portfolio unit value during
such period; (ii) the unit value of the Fund's cash distributions from
the Acadian 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 Acadian
Portfolio, expressed as a percentage of the Acadian Portfolio unit
value at the beginning of such period. For this purpose, the value of
distributions of realized capital gains per unit of the Acadian
Portfolio, of dividends per unit of the Acadian Portfolio paid from
investment income, and of capital gains taxes per unit of the Acadian
Portfolio paid or payable on undistributed realized long-term capital
gains shall be treated as reinvested in units of the Acadian Portfolio
at the unit
A-2
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 Acadian Portfolio unit value will be
determined net of all fees and expenses of the Fund attributable to
the Acadian Portfolio. Thus, the performance of the Acadian Portfolio
will be net of all fees and expenses of the Fund attributable to the
Acadian 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 the
Index provider.
(d) Performance Computations. The foregoing notwithstanding, any
computation of the investment performance of the Acadian 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 Advisor 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.
A-3
1. FEE EXAMPLE #1 - ADJUSTED FEE CALCULATION: The following example serves as a
guide for the calculation of the Adjusted Fee when the cumulative excess return
of the portfolio versus the Index falls within the linear adjustment range:
"Greater than 0% up to and including +50%".
Assume the Adjusted Fee for the fiscal quarter ending December 31, 2007 is
being calculated, the transition rules described in Schedule A, section 13.3.
are not in effect, and the month-end net assets of the Acadian Portfolio over
the rolling 36-month period applicable to such fiscal quarter are as follows:
---------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF ACADIAN PORTFOLIO ($ MILLION)
---------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
---------------------------------------------------------------------------------------------------------------
2004
---------------------------------------------------------------------------------------------------------------
2005 101 102 103 104 105 106 107 108 109 110 111 112
---------------------------------------------------------------------------------------------------------------
2006 113 114 115 116 117 118 119 120 121 122 123 124
---------------------------------------------------------------------------------------------------------------
2007 125 126 127 128 129 130 131 132 133 134 135 136
---------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the Acadian Portfolio over the
rolling 36-month period applicable to such fiscal quarter is +25.0%, and the
cumulative performance of the Index over such period is +20.5%. Thus, the excess
return of the Acadian Portfolio over the applicable period is +4.5%. The
Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending
December 31, 2007 would be $98,775.00 and is calculated as follows:
a. BASE FEE OF $81,000.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the Acadian Portfolio over the fiscal quarter ending
December 31, 2007 ($135,000,000), with an Annual Percentage Rate of (0.240%)
applied. 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 December
31, 2007, calculated as follows:
($134,000,000 + $135,000,000 + $136,000,000) / 3 = $135,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.240%)
Base Fee = ($135,000,000 X 0.240%) / 4 = $81,000.00
b. PERFORMANCE ADJUSTMENT OF +$17,775.00, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the Acadian Portfolio over the rolling
36-month period applicable to the fiscal quarter ending December 31, 2004 are
$118,500,000. The excess return of the Acadian Portfolio (+25.0%) over the Index
(+20.5%) over such period is +4.5%. An excess return of +4.5%, when applied to
the Performance Adjustment Schedule, corresponds to an excess return of 0% up to
and including +9%, which corresponds to an Adjustment Percentage of +25%. The
performance adjustment percentage is calculated as follows:
A-4
The Performance 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%)
Performance Adjustment Percentage = (4.5%/9.0%) X +50% = 25%
Therefore, the Performance Adjustment = ([f X g] X h) / 4
f = Performance Adjustment Percentage, (= 25%)
g = Annual Percentage Rate applied to average month end net assets, (= 0.240%)
h = Average month-end net assets for the 36-months ended
December 31, 2007, (= $118,500,000)
Performance Adjustment = ([25% X 0.240%] X $118,500,000) / 4 = +$17,775.00
c. An Adjusted Fee of $116,500.00, which is calculated as follows:
Adjusted Fee = i + j, where;
i = Base Fee, ( = $81,000.00)
j = Performance Adjustment, ( = $17,775.00)
Adjusted Fee = $81,000.00 + $17,775.00= $98,775.00
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the Acadian Portfolio and
the Index are treated in a symmetric manner, such as in the example.
A-5
2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The
following example serves as a guide for the calculation of the Adjusted Fee
during the transition period when the cumulative excess return of the portfolio
versus the Index falls within the linear adjustment range: "Greater than 0% up
to and including +9%".
Assume that the Advisor's compensation is being calculated for the fiscal
quarter ended June 30, 2006 and the month-end net assets of the Acadian
Portfolio over the 18-month period applicable to such fiscal quarter are as
follows:
--------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSETS OF ACADIAN PORTFOLIO ($ MILLION)
--------------------------------------------------------------------------------------------------------------
JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC
--------------------------------------------------------------------------------------------------------------
2004
--------------------------------------------------------------------------------------------------------------
2005 101 102 103 104 105 106 107 108 109 110 111 112
--------------------------------------------------------------------------------------------------------------
2006 113 114 115 116 117 118
--------------------------------------------------------------------------------------------------------------
2007
--------------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the Acadian Portfolio over the
18-month period applicable to the June 30, 2006 fiscal quarter is +15.0%, and
the cumulative performance of the Index over such period is +12.0%. Thus, the
excess return of the Acadian Portfolio over the applicable period is +3.0%. The
Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending
June 30, 2006 would be $81,171.90 and is calculated as follows:
a. BASE FEE OF $70,200.00, WHICH IS CALCULATED AS FOLLOWS. The average
month-end net assets of the Acadian Portfolio over the fiscal quarter ending
June 30, 2006 ($117,000,000), when applied to the Annual Percentage Rate of
(0.240%). 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 June 30, 2006,
calculated as follows:
($116,000,000 + $117,000,000 + $118,000,000) / 3 = $117,000,000
b = Annual Percentage Rate applied to average month end net assets, ( = 0.240%)
Base Fee = ($117,000,000 X 0.240%) / 4 = $70,200.00
b. PERFORMANCE ADJUSTMENT OF +$10,971.90, WHICH IS CALCULATED AS FOLLOWS.
The average month-end net assets of the Acadian Portfolio over the performance
period (January 1, 2005 to June 30, 2006) are $109,500,000. The excess return of
the Acadian Portfolio (+15.0%) over the Benchmark (+12.0%) over such period is
+3.0%. An excess return of +3.0%, when applied to the Performance Adjustment
Schedule, corresponds to a relative performance of 0% and up to and including
+9%, which corresponds to an Adjustment Percentage of +16.7%, calculated as
follows:
A-6
The Performance Adjustment Percentage = ([c / d] X k), where;
c = Percentage amount by which the performance of the Portfolio has
exceeded the Benchmark, ( = +3.0%)
d = Maximum Transition Period excess return for appropriate performance
range, determined as follows:
[(e / f) X g], where;
e = Number of months elapsed from December 31, 2004 to June 30, 2006 (= 18)
f = Number of months in full rolling performance period (= 36)
g = Maximum excess return for appropriate performance range (= +9.0%)
d = [(18/36) X +9.0%] = +4.5%
Maximum Transition Period Adjustment Percentage = [(e / f) X h] = k, where;
e = Number of months elapsed from December 31, 2004 to June 30, 2006 (= 18)
f = Number of months in full rolling performance period (= 36)
h = Maximum Adjustment Percentage for the appropriate performance range (= +50%)
Maximum Adjustment Percentage for transition period = [(18/36) X +50%) = +25.0%
= k
Adjustment Percentage = ([c / d]) X k) = l, therefore, ([+3.0%/+4.5%] X +25.0%)
= +16.7% = l
Therefore, the Performance Adjustment is equal to ([l X m] X n) / 4, where;
l = Adjustment Percentage, ( = +16.7%)
m = Annual Percentage Rate applied to average month-end net assets, ( = 0.240%)
n = Average month-end net assets for the transition period ended June 30, 2006
(= $109,500,000)
Performance Adjustment = ([+16.7% X 0.240%] X $109,500,000) / 4 = +$10,971.90
A-7
AN ADJUSTED FEE OF $81,171.90, WHICH IS CALCULATED AS FOLLOWS:
o + p = Adjusted Fee, where;
o = Base Fee, ( = $70,200.00)
p = Performance Adjustment, ( = $10,971.90)
Adjusted Fee = $70,200.00 + $10,971.90= $81,171.90
d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the
eighth decimal point. Performance differences between the Acadian Portfolio and
the Index are treated in a symmetric manner, such as in the example.
A-8
