Endowment Fund June 30 2007 Table of Contents

Endowment Fund June 30, 2007

Table of Contents 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

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 particular responsibilities for the endowment fund. 1

Introduction Committee Membership Trustee Finance Committee F. J. Ingrassia, Chair R. L. Brown, III M. K. Chrin J. H. Glanville A. K. Harkness M. L. Paley J. R. Perella E. J. Sussman R. C. Tschampion, III Lehigh Liasion – Margaret Plympton Investment Subcommittee R. C. Tschampion, III, Chair W. W. Crouse, III W. F. Hecht D. E. Singleton, III M. D. Zisman M. K. Chrin K. L. Clayton M. F. Hoben J. B. Mc. Gowan K. R. Parke S. Sethi Lehigh Liasion – Peter Gilbert A. J. Greenwood M. L. Paley 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

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

Lehigh University Endowment Fund Growth History 4

Endowment Increase by Components June 30, 1997 through June 30, 2007 Bequests and Gifts Investment Performance Endowment Spending Net Appreciation Increase $161, 865, 000 28% 410, 371, 000 72% $735, 407, 000 (325, 036, 000) $572, 236, 000 100% 5

Lehigh University Endowment Fund Increase by Component June 30, 1997 to June 30, 2007 6

Lehigh University Endowment Fund 25 Year Performance History June 30 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Avg. Annual Return Composite Index (65% Equities/35% Bonds) Note: Returns for 1986 & after are net of manager fees Total Return 44. 5 -1. 4 28. 9 24. 3 20. 8 3. 3 18. 6 8. 3 6. 1 13. 6 15. 4 2. 1 18. 6 16. 9 21. 4 21. 8 12. 4 19. 3 -4. 6 -5. 7 7. 2 16. 1 9. 5 12. 0 15. 7 13. 3% 11. 8% 7

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

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 72 nd 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

NACUBO Comparisons Endowment Size: Lehigh Rank 6/30/97 $513, 403, 000 6/30/07 $1, 085, 639, 000 61 of 495 Institutions 72 of 785 Institutions Endowment per FTE Student: Lehigh 6/30/97 $92, 505 6/30/07 $176, 383 Rank (Independent Institutions) n/a Average - All Schools $66, 303 $56, 766 $165, 636 n/a $92, 191 $160, 882 $422, 301 $149, 512 Independent Institutions: Over $500 million to $1 billion Over $1 billion All 99 of 516 10

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

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

Average Annual Return Ending June 30, 2007 for Each Period Lehigh University All Endowment Funds LU Rank Greater than $1 billion LU Rank Independent Institutions LU Equity S&P 500 10 Yrs 5 Yrs 3 Yrs 1 Year 9. 9% 12. 0% 12. 4% 15. 7% 8. 6% 100/499 11. 1% 202/636 12. 4% 333/683 17. 2% 538/726 11. 1% 13. 9% 62/76 16. 4% 71/76 21. 3% 76/76 44/72 8. 8% 11. 3% 12. 7% 17. 5% 11. 9% 7. 1% 15. 1% 10. 7% 15. 5% 11. 7% 20. 8% 20. 6% LU Bonds LB Aggregate 6. 3% 4. 5% 5. 2% 7. 4% 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

LU Investment Performance vs. All Participating Institutions June 30, 2007 LEHIGH High 1 st Q Median 3 rd Q Low 10 Years 5 Years 3 Years 1 Year 9. 9% 17. 8% 9. 5% 8. 4% 7. 3% 3. 4% 12. 0% 20. 1% 12. 4% 11. 3% 9. 8% 2. 1% 12. 4% 25. 0% 14. 0% 12. 3% 10. 7% 2. 3% 15. 7% 28. 0% 19. 0% 17. 5% 15. 6% 2. 6% 14

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

Asset Allocation June 30, 2007 6/30/97 LU Average 6/30/07 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% 10. 7% 10. 6% Hedge Funds - 1. 5% Natural Resources - - - 1. 6% Real Estate 0. 3% 2. 0% 0. 4% 3. 5% Other 3. 3% 1. 2% 8. 2% 1. 4% 100. 0% TOTAL 100. 0% 16

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 1997 Fiscal year 2007 Lehigh University 2. 0% Average - All Institutions 4. 7% 2. 9% Over $1 billion Over $500 million to $1 billion Over $100 million to $400 million N/A 4. 7% 4. 4% 2. 8% N/A Independent Institutions 3. 5% 2. 1% 17

Gift Flow Rate Fiscal Year 1997 -2007 18

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

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 1997 2007 Lehigh University 4. 2% Average - All Institutions 4. 5% 4. 6% Over $1 billion Over $500 million to $1 billion Over $100 million to $400 million N/A 4. 7% 4. 4% N/A Independent Institutions 4. 5% 4. 7% 20

Endowment Spending Rate 1997 - 2007 21

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