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Endowment Fund June 30, 2007

Endowment Fund June 30, 2007. Introduction…………………………………….………………......….1 Endowment History………………………………........................…3 Endowment Growth…………………........................................4 Increases by Component……………………………….............5 Endowment Performance….…………………………………….7

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Endowment Fund June 30, 2007

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  1. Endowment Fund June 30, 2007

  2. Introduction…………………………………….………………......….1 Introduction…………………………………….………………......….1 Endowment History………………………………........................…3 Endowment Growth…………………........................................4 Increases by Component……………………………….............5 Endowment Performance….…………………………………….7 NACUBO Comparisons…...……………………………………..…..8 Size & Endowment per FTE Student…………………….........9 Investment Performance……………………..…………..…….12 Asset Allocation……………………………………………….…16 Gift Flow Rate……………….…………………………………....18 Endowment Spending Rate..…………………………….....…21 Table of Contents

  3. Introduction An endowment fund for an educational institution provides long-term continuous support for various programs and services. Lehigh University recognizes the importance of providing enduring financial support through endowment and desires to enhance its endowment position through the procurement of new endowment contributions and the prudent management of its invested funds. Trustee Responsibilities The University By-Laws provide that one of the general powers of the Board of Trustees is to oversee the management of the University's endowment and investments. The Board has delegated endowment management responsibility to its Finance Committee, which has specific responsibility for endowment and similar funds as defined in the By-Laws as follows: 1. Establish and monitor investment policies and guidelines. 2. Manage investments through the appointment of managers and/or internal management. 3. Review at least annually the investment performance. 4. Establish a policy regarding disbursement of income. Because sound endowment management policy suggests a clear separation between certain functions such as asset allocation decisions and the determination of endowment spending policy, the Finance Committee has established an Investment Subcommittee that has particularresponsibilities for the endowment fund. 1

  4. Introduction • Committee Membership • Trustee Finance Committee • F. J. Ingrassia, Chair • R. L. Brown, III M. K. Chrin W. W. Crouse, III • J. H. Glanville A. K. Harkness W. F. Hecht M. L. Paley J. R. Perella D. E. Singleton, III • E. J. Sussman R. C. Tschampion, III M. D. Zisman • Lehigh Liasion – Margaret Plympton • Investment Subcommittee • R. C. Tschampion, III, Chair • M. K. Chrin K. L. Clayton A. J. Greenwood • M. F. Hoben J. B. McGowan M. L. Paley • K. R. Parke S. Sethi • Lehigh Liasion – Peter Gilbert • Annual Reporting • The Trustee Finance Committee desires to report annually to the Board of Trustees upon the status of the University's endowment fund. These reports will present the general progress and stewardship of endowment at Lehigh. This report will give specific attention to: • 1. Historical changes, • 2. Performance and comparative data with other colleges and universities, and • 3. Policies and procedures. 2

  5. Endowment History The University's Endowment Fund has experienced rapid growth in market value over the past ten years from approximately $513 million at June 30, 1997, to $1,086 million at June 30, 2007. The value as of March 31, 2008 was approximately $1.1 billion. The market value increase over the past 10 years can be broken down into the following components: Gifts Realized and Unrealized Gains Reinvested Earnings The following three pages highlight the market growth and the components of that growth over the past 10 years. Lehigh Endowment Fund’s 25-year performance history is provided on page 7. The endowment fund has returned an average total annual return of 13.3% over the 25-year period, which compares favorably to the composite index of 11.8%. 3

  6. Lehigh University Endowment FundGrowth History 4

  7. Endowment Increase by ComponentsJune 30, 1997 through June 30, 2007 Bequests and Gifts $161,865,000 28% Investment Performance $735,407,000 Endowment Spending (325,036,000) Net Appreciation 410,371,00072% Increase $572,236,000 100% 5

  8. Lehigh University Endowment FundIncrease by Component June 30, 1997 to June 30, 2007 6

  9. June 30Total Return 1983 44.5 1984 -1.4 1985 28.9 1986 24.3 1987 20.8 1988 3.3 1989 18.6 1990 8.3 1991 6.1 1992 13.6 1993 15.4 1994 2.1 1995 18.6 1996 16.9 1997 21.4 1998 21.8 1999 12.4 2000 19.3 2001 -4.6 2002 -5.7 2003 7.2 2004 16.1 2005 9.5 2006 12.0 2007 15.7 Avg. Annual Return 13.3% Composite Index (65% Equities/35% Bonds) 11.8% Note: Returns for 1986 & after are net of manager fees Lehigh University Endowment Fund25 Year Performance History 7

  10. NACUBO Comparisons The NACUBO Endowment Study (NES) is an annual report prepared by TIAA/CREF under the direction of the National Association of College and University Business Officers (NACUBO). The report is a useful tool for colleges and universities to help evaluate the effectiveness of their endowment policies and investment performance. Lehigh has participated in the NES for over three decades. The 2007 Study reports on over 780 participating institutions of higher education. The following pages compare various aspects of Lehigh's endowment fund with one or more of: a) the universe of all participating colleges and universities; b) participating independent schools; and c) participating institutions of similar endowment size (greater than $1 billion). The latter, when available, is the most useful standard of comparison for Lehigh. 8

  11. NACUBO Comparisons Endowment Size and Endowment per FTE Student Page 10 indicates the growth of Lehigh's endowment fund from 1997 to 2007. As of June 30, 2007, the University ranks 72nd in endowment size among 785 participating institutions. Lehigh's $176,383 endowment per FTE student compares favorably to the $160,882 for independent institutions over $500 million to $1 billion and $149,512 for all independent institutions. Although we have improved our position compared to these endowment classifications, Lehigh continues to rank in the lower half of the list among institutions with which we compete for students (see page 11). The endowment per FTE student for independent institutions with endowments greater than is $422,301. 9

  12. NACUBO Comparisons Endowment Size: 6/30/976/30/07 Lehigh $513,403,000 $1,085,639,000 Rank 61 of 495 72 of 785 Institutions Institutions Endowment per FTE Student: 6/30/976/30/07 Lehigh $92,505 $176,383 Rank (Independent Institutions) n/a 99 of 516 Average - All Schools $66,303 $56,766 Independent Institutions: Over $500 million to $1 billion $165,636$160,882 Over $1 billion n/a $422,301 All $92,191 $149,512 10

  13. Endowment per FTE StudentLehigh vs. Aspirational PeersJune 30, 2007 Market Value FTE Endowment Institution in 000s Studentsper Student Rice University $4,669,544 4,932 946,785 University of Notre Dame 5,976,973 11,495 519,963 Emory University 5,561,740 12,130 458,511 Northwestern University 6,503,292 16,365 397,390 Brown University 2,780,798 7,940 350,226 University of Pennsylvania 6,635,187 20,909 317,336 Lafayette College * 734,421 2,327 315,609 Vanderbilt University 3,487,500 11,600 300,647 Cornell University 5,424,700 19,639 276,222 University of Rochester 1,726,300 7,864 219,522 LEHIGH UNIVERSITY 1,085,639 6,155 176,383 Tufts University 1,452,058 9,257 156,861 Carnegie Mellon University 1,115,740 9,303 119,933 Georgetown University 1,059,343 13,141 80,614 George Washington University 1,147,451 19,954 57,505 * Lafayette College is included for informational purposes only. 11

  14. NACUBO Comparisons Investment Performance Lehigh's endowment returns for the five and ten-year periods ending June 30, 2007 ranked in the top third and top fifth of all endowment pools. This meets or exceeds Lehigh’s performance objective of top third performance vs. all endowment funds. Performance information can be found on the following three pages. 12

  15. Average Annual ReturnEnding June 30, 2007 for Each Period 10 Yrs5 Yrs3 Yrs1 Year Lehigh University9.9% 12.0% 12.4% 15.7% All Endowment Funds 8.6% 11.1% 12.4% 17.2% LU Rank 100/499 202/636 333/683 538/726 Greater than $1 billion 11.1% 13.9% 16.4% 21.3% LU Rank 44/72 62/76 71/76 76/76 Independent Institutions 8.8% 11.3% 12.7% 17.5% LU Equity 11.9% 15.1% 15.5% 20.8% S&P 500 7.1% 10.7% 11.7% 20.6% LU Bonds 6.3% 6.3% 4.5% 7.4% LB Aggregate 6.3% 6.3% 5.2% 7.5% LU Composite Benchmark 7.1% 8.7% 9.0% 15.4% Added Value over Benchmark 2.8% 3.3% 3.4% .3% 13

  16. LU Investment Performance vs. All Participating Institutions June 30, 2007 14

  17. NACUBO Comparisons Asset Allocation The asset allocation of Lehigh's endowment fund at June 30, 2007 tends to reflect the average of all participating institutions with exception of under weightings in domestic equities, cash and real estate and over weightings in non-U.S. equities, fixed income, private equity/venture capital and other. The following page indicates asset allocation data as of June 30, 1997 and 2007. 15

  18. Asset AllocationJune 30, 2007 6/30/976/30/07 LU Average LU Average Equity – U.S. 47.6% 52.6% 36.6% 40.5% Equity – Global/Foreign 11.8% 11.2% 18.7% 17.1% Fixed Income 30.4% 25.2% 19.3% 18.6% Cash 4.4% 4.8% 2.3% 3.5% Private Equity/Venture Capital 2.2% 1.5% 3.8% 3.2% Hedge Funds - 1.5% 10.7% 10.6% Natural Resources - - - 1.6% Real Estate 0.3% 2.0% 0.4% 3.5% Other 3.3% 1.2% 8.2% 1.4% TOTAL 100.0%100.0%100.0%100.0% 16

  19. NACUBO Comparisons Endowment Gift Flow Rate The endowment gift flow rate measures the percent of the market value increase at June 30 related to gifts received during the year. The percentage can fluctuate significantly depending on the gift activity, such as endowment campaign gifts and large bequests received, in a particular year. The year by year gift flow rate is charted on the following page. Fiscal year 1997Fiscal year 2007 Lehigh University 2.0% 2.0% Average - All Institutions 4.7% 2.9% Over $1 billion N/A 2.4% Over $500 million to $1 billion 4.7% 2.8% Over $100 million to $400 million 4.4% N/A Independent Institutions 3.5% 2.1% 17

  20. Gift Flow RateFiscal Year 1997-2007 18

  21. NACUBO Comparisons Endowment Growth and Gifts Year to year endowment growth is influenced by gifts and investment performance. The university has experienced a period of strong investment performance over the past 10 years as well as other endowments. This has added to the value of the endowment fund resulting in additional income for the university’s educational mission. While we are pleased with the success of the investment results, we recognize that future returns are forecasted to be modest. For example, long term rates of return in the 8% range are expected to be the norm in the coming years. With the endowment spending of roughly 5% annually, the remaining 3% will help keep pace with the inflation rate and hopefully maintain the purchasing power of the endowment fund. If we are to meet the challenge of endowment growth relative to our peers, gifts to endowment will be the key. A significant portion (60%) of Shine Forever: The Campaign for Lehigh, our current comprehensive campaign, is focused on endowment, particularly for endowed scholarships and endowed chairs. While Lehigh maintains a strong planned giving program to encourage testamentary gifts to endowment, the campaign provides an opportunity to emphasize current gifts to endowment from alumni and friends. These gifts will be the cornerstone to future growth of the endowment fund. 19

  22. NACUBO Comparisons Endowment Spending Rate Below are details of Lehigh's spending as a percentage of the current year’s average market value. Lehigh’s spending rate in 2007 was below the NACUBO average for all endowments, the average for endowments over $1 billion, and the independent institution average. Further information regarding Lehigh’s spending policy and historic spending rates can be found on following two pages. FISCAL YEAR 19972007 Lehigh University 4.2% 4.2% Average - All Institutions 4.5% 4.6% Over $1 billion N/A 4.4% Over $500 million to $1 billion 4.7% 4.4% Over $100 million to $400 million 4.4% N/A Independent Institutions 4.5% 4.7% 20

  23. Endowment Spending Rate1997 - 2007 21

  24. NACUBO Comparisons Endowment Fund Spending Policy The Endowment will transfer to the University's Operating Fund annually 5% of the three year moving average market value of the Endowment. On a per unit basis, the transfer will result in a minimum increase of 0% and a maximum increase of 10% over the prior year's payout. 22

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