Endowment Overview The Investment Office manages Lehigh’s Endowment, which at approximately $1.2 billion is the University’s largest tangible asset. The Endowment serves as a key source of funding to the University each year, providing for scholarships, academic programs, and faculty endowed chairs. The Endowment is a long-term perpetual asset. Its role is to provide financial support to the benefit of both the current generation and future generations of Lehigh students. Therefore, the investment program maintains a long-term focus. Good stewardship of this asset is of the highest importance, which is why the Endowment is managed by an Investment Office and overseen by an Investment Subcommittee of the Board of Trustees. The Investment Subcommittee, a group of alumni investment professionals, sets investment policy in keeping with Lehigh’s long-term goals and objectives. The Investment Office is responsible for carrying out investment policy by investing the portfolio in a globally diversified mix of external managers, including equity, fixed income, hedge funds, private equity, and real assets. Since first adopting this structure in 2007, the Endowment has outperformed its policy benchmark while exhibiting less risk.
Objectives FINANCIAL OBJECTIVE The principal financial objective of the investment program is to preserve and, if possible, enhance the real purchasing power of the Endowment principal in order to ensure the University’s financial future. The Endowment must strike a balance between the preservation of principal in real terms for perpetuity and support of the University’s current operating needs.
INVESTMENT OBJECTIVES In order to achieve the financial objectives of the investment program, the investment goal of the Endowment is to generate a real return of 5% annualized (net of inflation) over the long run. The 5% real return goal is expected to allow the University to grow the principal of the Endowment in order to support future generations’ needs, and to maintain its current spending objective which supports near-term University operations. It is understood that the asset allocation of the Endowment will be the primary driver of its performance over time. The Finance Committee and Investment Subcommittee set the asset allocation policy that is expected to achieve the 5% real return investment objective. At least every four years a formal asset allocation review of the Endowment is conducted to ensure that the portfolio is appropriately structured given the financial needs and constraints of the University. While the Finance Committee and Investment Subcommittee set the asset allocation policy, the Investment Office is responsible for the implementation of the policy and the day to day management of the Endowment. The Investment Office is evaluated based on the actual Endowment performance relative to the asset allocation policy benchmark. Over the long term, focusing on three to five year periods, the expectation is to outperform the asset allocation policy benchmark and therefore exceed the real return objective.
SPENDING OBJECTIVE The Endowment will transfer to the University’s Operating Fund annually 5% of the twelve quarters 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.
TARGET ASSET ALLOCATION
Governance The University Bylaws 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 establishment of an endowment spending policy, the Finance Committee established an Investment Subcommittee, which has been vested with particular responsibilities related to the management of the University’s Endowment. The Investment Subcommittee is broadly responsible for the fiduciary oversight of the Investment Office, recommend-ing investment policy guidelines for the Endowment including asset allocation targets and ranges, and monitoring conformance. The Investment Office is responsible for the day-to-day operations of the investment program, which includes hiring, monitoring and terminating investment managers.
COMMITTEE MEMBERSHIP TRUSTEE FINANCE COMMITTEE Chair: Robert L. Brown III, Partner, PricewaterhouseCoopers Maria L. Chrin, Founder and Managing Partner, Circle Wealth Management LLC Kevin Clayton, Managing Director, Makena Capital Francis J. Ingrassia, President and CEO, Clever Devices, Ltd. Joseph R. Perella, Founding Partner and Chairman, Perella Weinberg Partners LP J. Stuart Ryan, Founding Owner and President, Rydout LLC Sarat Sethi, Vice Chair, Principal, Douglas C. Lane & Associates Daniel E. Smith, Former President and CEO, Sycamore Networks, Inc. F.E. Walsh, Partner, WR Capital Partners Luis Zuluaga, Chair of FFPOC
INVESTMENT SUBCOMMITTEE Chair: Sarat Sethi, Vice Chair, Principal, Douglas C. Lane & Associates Gaby Abdelnour, Senior Advisor, Bain Capital LLC Maria L. Chrin, Founder and Managing Partner, Circle Wealth Management LLC Kevin Clayton, Managing Director, Makena Capital Jeffrey D. Enslin, Partner, Caxton Associates LP Jordan Hitch Mark V. Mactas, Retired Deputy Chairman, President and Chief Operating Officer, Towers Watson William G. Pertusi, Chief Risk Officer & Principal, Graham Capital Management Frank E. “Ted” Walsh, Jupiter Capital Management Partners
INVESTMENT OFFICE STAFF Kristin Agatone, Chief Investment Officer, Lehigh University Endowment Kristin Agatone is the Chief Investment Officer (CIO) of the Lehigh University Investment Office. As CIO, Kristin oversees the management of the Lehigh Endowment, ensuring financial support for major initiatives and the university's broader mission. Before joining Lehigh, Kristin was a managing director at Summit Rock Advisors, where she led the investment strategy for multiple asset classes. Prior to her time with Summit Rock, she worked at Boston-based Harvard Management Company, which manages the Harvard University Endowment. She previously worked in the private equity group at TPG Capital in San Francisco and the investment banking division at Goldman Sachs. Kristin earned a B.A. in economics magna cum laude from Harvard College and received an M.B.A from Harvard Business School. Jennifer B. Sassani, Director of Alternative Investments Jennifer B. Sassani serves as Lehigh University’s Endowment Fund Director of Alternative Investments. She is responsible for overseeing the private equity program and the private real assets initiative, which includes real estate, timber, and commodities. She also functions as the Chief Operating Officer of the Investment Office. Prior to joining Lehigh University in 2007, Ms. Sassani was the Co-Director of Alternative Investments for the Pennsylvania State Employees’ Retirement System (SERS). She was one of four investment professionals managing SERS’ $10 billion private equity program, which included investments in venture capital, buyout, distressed, oil and gas, secondary, and fund-of-funds. Ms. Sassani holds a B.S.B.A from Shippensburg University and a M.S.B.A. from Bucknell University. She is a member of the Shippensburg University Finance Advisory Counsel. Corey P. Galstan, CFA, Director of Public Markets Investments Corey P. Galstan currently serves as the Director of Public Markets for Lehigh University. Mr. Galstan is responsible for the oversight of the marketable portion of the Lehigh endowment, including developed and emerging markets equities, hedged equity, absolute return, natural resource equities, commodities, and fixed income. Prior to joining the Lehigh investment team, Mr. Galstan worked at the Princeton Theological Seminary as a Senior Investment Analyst, where he worked with the Chief Investment Officer to manage all aspects of a $900 million endowment. Previously, Mr. Galstan held various financial roles with the Federal Government, most recently as a Financial Analyst at the Pension Benefit Guaranty Corporation (PBGC). Mr. Galstan completed his B.S. with a concentration in Finance at Virginia Commonwealth University, and is a CFA Charterholder. Matthew L. Mongon, CFA, Senior Investment Analyst Matthew L. Mongon serves as the Senior Analyst in the Investment Office, providing analytical support on investment manager due diligence, performance and risk analysis, and investment operations. Prior to joining Lehigh, he spent six years at Molewski Financial Partners (MFP), a consulting firm based in Bethlehem, Pa., with approximately $2 billion in assets under management/advisory. Mr. Mongon was Director of Investment Research for the firm, responsible for managing the firm’s investment process, including manager research, strategic asset allocation, and tactical asset allocation. He also served as a Senior Consultant in the firm’s Investment Consulting Group, advising MFP’s endowment, pension, and family wealth clients on asset allocation, manager selection, and portfolio construction. Mr. Mongon graduated from The Wharton School, University of Pennsylvania, with a B.S. in Economics and a concentration in Finance. He is a CFA charterholder and member of the CFA Society of Philadelphia. Elaine P. Kudella, Business Manager Elaine Kudella has served as the Business Manager in the Investment Office since its inception, October 2007. She started her career at Lehigh in 1985 in the Internal Audit and Budget Offices, transferring later to Human Resources, and then to the General Counsel’s Office. Ms. Kudella is a Notary Public.
Endowment Asset Allocation Asset allocation is generally the primary driver of investment returns and risk over time; therefore, asset allocation policy is of central importance to the Endowment. The development of an asset allocation policy must incorporate a thoughtful understanding of the University’s financial needs, goals, and willingness and ability to assume risk in pursuit of growth. The Endowment’s asset allocation policy is formally reviewed every four years, with the most recent review taking place over the course of Fiscal 2014. The asset allocation review process begins with an enterprise review of the University, looking at the University from a holistic standpoint. This holistic perspective is the basis for determining an appropriate level of risk and return for Lehigh to pursue in its investments. The process is a collaborative effort involving the leadership of both the University’s administration and the Board of Trustees. The most recent review affirmed that Lehigh enjoys a healthy financial position and a strong credit rating; therefore, by taking on appropriate levels of risk Lehigh has the ability to pursue an investment program with a strong growth orientation. Philosophy underlying Lehigh’s Asset Allocation Policy: • Asset allocation is the main driver of investment returns. • The policy should maximize “growth” assets to the fullest extent allowed by Lehigh’s risk tolerance, since growth assets such as equities tend to outperform other assets over the long run. • The policy should include inflation-hedging and deflation-hedging assets to support Endowment spending when macroeconomic shocks cause distress in growth assets. • The addition of diversifying asset classes can help mitigate shorter-term volatility.
LEHIGH ENDOWMENT TARGET ASSET ALLOCATION - ADOPTED 2014
Performance The net Endowment investment performance for fiscal year 2015 was 2.4%, outperforming the policy benchmark by 0.4%. After two strong years for equity markets, global stocks underwhelmed in fiscal 2015 with the MSCI World Index earning a return of 1.4%. US stocks were a relative bright spot, but a strong rally in the dollar caused losses in foreign equities, particularly emerging markets. Bond returns were also low for the year as low interest rates continued to weigh on performance, while commodities and other natural resource-related investments experienced losses in the face of a dramatic fall in oil prices. Against this backdrop the Endowment outperformed its policy benchmark, primarily through outperformance of our equity, credit and absolute return managers, which was partially offset by losses in the oil and gas portion of our private equity portfolio. When the year began, equity markets had been rising steadily for several years and volatility had fallen to near record lows. Since then, volatility has come roaring back as investors increasingly focus on risks such as Fed policy uncertainty and Chinese economic troubles. Nevertheless, there are some positives to the outlook as well: the US economy is in decent shape, inflation is low, interest rates are low, and valuations (while still elevated) have come down from their highs. Looking ahead, therefore, on balance it seems that capital markets may continue to offer opportunities for return, albeit at a lower level than we’ve seen in the last several years. In such an environment it is important to be selective in pursuing opportunities, to manage risk, and to ensure that one has sufficient liquidity to be able to manage through potential downturns. We believe that the Endowment is well positioned to meet these objectives over the coming years and beyond.
Instruction includes expenses for all activities that are part of the University’s instructional program, both credit and noncredit. This category includes expenses of academic departments and programs, including summer sessions.
Student Services includes expenses incurred for student services administration, student activities and cultural events, athletics, counseling and career guidance, health services, financial aid administration, admissions, and student records.
Research includes expenses for research activities, whether sponsored by agencies external to the University (generally referred to as grants and contracts), or separately budgeted by an organizational unit within the University.
Institutional Support includes expenses incurred for executive management, fiscal operations, treasury and investment functions, general administration, legal services, administrative computing support, human resources, purchasing, risk management, and community alumni relations, including development and fundraising.
Public Service includes expenses for activities established primarily to provide non-instructional services beneficial to groups external to the university. Included are certain conferences, community programs, and advisory services. Academic Support includes expenses incurred to provide support services for the University’s primary missions: instruction, research, and public service. It includes expenses for libraries, galleries, academic computing support, Zoellner Arts Center, and academic administration, including academic deans.
Auxiliary Enterprises includes expenses from departments that are managed to operate as self-supporting activities, most significantly residential areas and dining services. Independent Operations includes the following subsidiary organizations: Ben Franklin Technology Partners, Manufacturers Resource Center, and the Lehigh and Northampton Counties Revolving Loan Fund. These subsidiaries share a common mission to encourage economic growth within their respective territories in Pennsylvania.
omposite Benchmark is a weighted average of market indexes that represent each asset class in the Endowment’s policy asset allocation. The composition of the benchmark has changed over C time in conjunction with changes in the Endowment’s long-term asset allocation policy. As of June 30, 2015, the Composite Benchmark consisted of: 30.7% MSCI World Index ND, 7% HFRI Equity Hedge (Total) Index, 9% MSCI Emerging Markets Index ND, 15% HFRI Fund of Funds: Conservative Index, 2% S&P Global Natural Resources Index, 1% S&P GSCI, 1% Bloomberg Commodity Index, 8% Barclays US Treasury 5-10 Year Index, 4% BofA ML US High Yield Corporate BB-Rated Index, 17% Private Equity Benchmark, 3.3% Real Estate Benchmark, 2% 91-Day Treasury Bill.
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Risk is displayed as the volatility of returns, defined as the annualized standard deviation of monthly returns of the Endowment portfolio and its Composite Benchmark.
Growth of Endowment The University’s Endowment Fund has grown in market value from approximately $849 million at June 30, 2005, to $1.21 billion at June 30, 2015. The market value increase over the past 10 years can be broken down into the following components: • Gifts • Realized and Unrealized Gains • Reinvested Earnings • Less: Endowment Spending The following charts highlight the market growth and the components of that growth over the past 10 years.
