Endowment Fund Report June 30, 2009

Table of Contents Introduction…………………………………….………………......….1 Endowment History………………………………........................…3 Endowment Growth…………………........................................4 Increases by Component……………………………….............5 Endowment Performance….…………………………………….7 NCSE………………………...…………………………………………..8 Size & Endowment per FTE Student……………………..........9 Investment Performance……………………..……………..….12 Asset Allocation……………………………………………….…15 Gift Flow Rate……………….…………………………………....16 Endowment Spending Rate..…………………………….....…19

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. 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. The Finance Committee is responsible for approving and recommending to the Board general guidelines for the management of the University’s endowment and investments. 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 particular responsibilities for the endowment fund as follows: 1. Fiduciary oversight of the Investment Office. 2. Recommend investment policy guidelines for the endowment and monitor conformance. 3. Recommend asset allocation targets and ranges, and monitor conformance. Due to the increased size, complexity and sophistication of the investment portfolio, the Subcommittee has established an Investment Office with the delegated responsibility to manage the day-to-day operations of the investment program. 1

Trustee Finance Committee Investment Subcommittee Introduction Committee Membership Trustee Finance Committee F. J. Ingrassia, Chair R. L. Brown III M. K. Chrin J. H. Glanville T. J. Healy, Jr. W. F. Hecht M. L. Paley J. R. Perella D. E. Singleton III E. J. Sussman R. C. Tschampion III M. D. Zisman Lehigh Liaison – Margaret Plympton Investment Subcommittee M. K. Chrin K. L. Clayton J. Enslin A. J. Greenwood S. Kreider M. L. Paley K. R. Parke S. Sethi Lehigh Liaisons – Peter Gilbert, Mark Siddoway & Jennifer Sassani 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

Realized and Unrealized Gains Endowment History The University's Endowment Fund has grown in market value from approximately $676 million at June 30, 1999, to $886 million at June 30, 2009. The value as of December 31, 2009 approximately $978 million. 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 10.6% over the 25-year period, which compares favorably to the composite index of 9.7%. 3

Lehigh University Endowment Fund Growth History 4

Endowment Increase by Components June 30, 1999 through June 30, 2009 Gifts and Other Additions $220,966,000 Investment Performance $264,015,000 Endowment Spending (274,342,000) Increase $210,639,000 5

Lehigh University Endowment Fund Increase by Component June 30, 1999 to June 30, 2009 (in millions) 6

Lehigh University Endowment Fund 25 Year Performance History June 30 Total Return 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 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 2008 -2.7 2009 -18.3 Avg. Annual Return 10.6% Composite Index (65% Equities/35% Bonds) 9.7% 7

NCSE Comparisons The National Association of College and University Business Officers (NACUBO) and Commonfund have published the NACUBO-Commonfund Study of Endowments® (NCSE). This 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 NACUBO sponsored Endowment Studies for over three decades. The 2009 Study reports on 842 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 of $500 million to $1 billion and greater than $1 billion. 8

Endowment Size and Endowment per FTE Student NCSE Comparisons Endowment Size and Endowment per FTE Student Page 10 indicates the growth of Lehigh's endowment fund from 1999 to 2009. As of June 30, 2009, the University ranks 62nd in endowment size among 842 participating institutions. Lehigh's $140,896 endowment per FTE student does not compare favorably to the $233,846 for independent institutions over $500 million to $1 billion but does compare favorably to $110,645 for all independent institutions. 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 $1 billion is $666,377. 9

NCSE Comparisons 10 Endowment Size: 6/30/99 6/30/09 6/30/99 6/30/09 Lehigh $675,595,000 $886,234,000 Rank 62 of 503 62 of 842 Institutions Institutions Endowment per FTE Student: Lehigh $119,195 $140,896 Rank (Independent Institutions) 94 of 344 88 of 533 Average - All Schools $91,656 $75,599 Independent Institutions: Over $500 million to $1 billion $139,190 $233,846 Over $1 billion n/a $666,377 All $127,023 $110,645 10

Endowment per FTE Student Lehigh vs. Aspirational Peers June 30, 2009 Market Value FTE Endowment Institution in 000s Students per Student Rice University 3,612,884 5,305 681,034 University of Notre Dame 4,795,303 11,651 411,579 Northwestern University 5,445,260 16,190 336,335 Emory University 4,328,436 12,930 334,759 Brown University 2,017,006 7,975 252,916 Trustees of the Univ. of Penn 5,170,538 21,454 241,006 Vanderbilt University 2,833,614 12,093 234,319 Lafayette College * 535,585 2,351 227,812 Cornell University 3,966,041 20,273 195,632 University of Rochester 1,314,603 8,658 151,837 LEHIGH UNIVERSITY 886,234 6,290 140,896 Tufts University 1,103,440 9,658 114,251 Carnegie Mellon University 754,131 10,135 74,409 Georgetown University 883,182 13,919 63,452 George Washington University 1,011,000 20,598 49,082 * Lafayette College is included for informational purposes only. 11

Investment Performance NCSE Comparisons Investment Performance Lehigh's endowment return for the ten year period ending June 30, 2009 ranked in the top third performance vs. all endowment funds. Returns for the one and five year periods ending June 30, 2009 ranked in the top half. Performance information can be found on the following two pages. 12

Average Annual Return Ending June 30, 2009 for Each Period 10 Yrs 5 Yrs 3 Yrs 1 Year Lehigh University 4.2% 2.4% - 2.8% -18.3% All Endowment Funds 4.0% 2.7% -2.5% -18.7% LU Rank 136/421 303/649 373/687 328/793 Greater than $1 billion 6.1% 5.1% -0.8% -20.5% LU Rank 34/47 46/51 44/51 15/53 $500 million - $1 billion 4.3% 3.5% -2.0% -19.8% Independent Institutions 4.2% 2.9% -2.6% -19.1% LU Global Equity N/A 0.1% -7.0% -27.7% MSCI World (net) N/A 0.0% -8.0% -29.5% LU Bonds N/A 2.6% 2.5% 0.8% BC Treas Int N/A 4.9% 7.0% 6.1% LU Composite Benchmark 2.4% 2.1% -3.0% -17.5% Added Value over Benchmark 1.8% 0.3% 0.2% -0.8% 13

LU Investment Performance vs LU Investment Performance vs. All Participating Institutions June 30, 2009 When doing graph if the low point is a positive number you must subtract the high from the low and put the net in the high cell and the low in the low cell. Then format the low cell on the graph to have no fill. LU objective to be in top third over long run. In top quartile in 3, 5 and 10 years – objective achieved and exceeded. Ivy’s handout 10 Years 5 Years 3 Years 1 Year LEHIGH 4.2% 2.4% -2.8% -18.3% High 33.0% 31.4% 24.3% 15.9% 1st Q 4.8% 3.8% -1.1% -16.4% Median 3.3% 2.1% -2.6% -19.1% 3rd Q 2.3% 1.3% -4.0% -21.7% Low -4.2% -39.0% -40.0% 14

Asset Allocation June 30, 2009 15 6/30/99 6/30/09 6/30/99 6/30/09 Equal Weighted Equal Weighted Equal Weighted LU All Institutions LU All Institutions $500mm - $1billion Global Equity 61.1% 64.3% 41.0% 46.0% 37.0% Fixed Income 30.3% 23.1% 10.2% 21.0% 14.0% Alternative Strategies 4.9% 8.6% 35.4% 25.0% 43.0% ST Securities/Cash/Other 3.7% 4.0% 13.4% 8.0% 6.0% TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 15

Endowment Gift Flow Rate NCSE 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 1999 Fiscal year 2009 Lehigh University 1.7% 1.6% Average - All Institutions 5.3% 1.6% Over $1 billion N/A% 1.0% Over $500 million to $1 billion 3.8% 2.4% Independent Institutions 4.4% 1.2% 16

Gift Flow Rate Fiscal Year 1999-2009 17

Endowment Spending Rate NCSE 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 2009 was above the NCSE 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 1999 2009 Lehigh University 3.6% 5.0% Average - All Institutions 4.5% 4.4% Over $1 billion 4.1% 4.6% Over $500 million to $1 billion 4.3% 4.9% Independent Institutions 4.5% 4.5% 18

Endowment Spending Rate 1999 - 2009

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. For fiscal year 2010 the spending amount per share has been reduced by 5% of computed amount in order to minimize the impact on the endowment corpus during the challenging economic environment. 20