The University employs a range of active and passive strategies. As of 9/30/01 approximately 10% of the portfolio is managed in straight index funds, while another 18% is managed in modularized (index funds broken into their component parts to allow for elective weightings away from the relevant benchmark - e.g. the EAFE index is made up of 20 countries and for the period from 1994 until 1998 the Investment Office under weighted Japan) and enhanced (risk controlled strategies that are managed to perform very close to the underlying benchmarks) strategies. The remaining 72%, which is actively managed, can be broken down as follows: 16% internally managed Fixed Income, 4% actively managed public securities and 50% actively managed alternative strategies.

The internally managed Fixed Income portfolio is managed using various quantitative risk controlled techniques.

External managers are retained to manage strategies that are beyond the scope of the University's staff. It is assumed that these "satellite" strategies will shift from time to time depending upon changing markets and the University's needs.

Satellite managers:

1. employ investment styles or strategies, which are different and complementary to the internal "core" strategies.
2. have a higher risk/reward profile than "core" strategies
3. are expected to realize significant outperformance over appropriate benchmarks over a given market cycle.
4. serve as a source of economic and market opinion as well as a sounding board for the internal staff.

The University, where practical, will use investible benchmarks for monitoring the performance of its various managers and strategies (i.e. S & P 500, Lehman Government/Corporate). In the event that it is determined that (because of the efficiency of a particular market or underperformance) active strategies are no longer practical, the option will exist of converting to a passive indexed strategy.

Performance

The Investment Office is responsible for performance reporting. Given the University's long-term investment horizon, portfolio performance should be measured for investment cycles, but monitored on a monthly and quarterly basis (some internally managed funds are monitored daily). Benchmarks have been identified for each asset class and relative as well as absolute performance is reported. On at least an annual basis, attribution analysis is completed and peer comparisons presented.

Given the size of the University's Endowment, the Investment Office recognizes the significant dollar impact of even marginal improvements in portfolio performance. To this end it is continually re-examing and improving strategies and tactics and strives within the context of this Investment Policy to achieve top quartile returns among peer institutions.

Valuation

The Office of the Controller (Accounting Services unit) is responsible for the initiation and development of valuation policies for investment securities, assuring that such policies are in compliance with generally accepted accounting principles (GAAP).

Most Equity and Fixed Income securities are valued at the last sale price, where quotations are readily available, or if no sale price, at the closing bid price in the principal market in which such securities are normally traded. Certain Fixed Income securities are valued using dealer-supplied valuations.

Most private investment securities (for which quotations are generally not readily available) have historically been carried at cost. Starting in 1996, we valued these securities at their fair value as determined in good faith by the managers provided the investment had reached its two-year anniversary or that 75% of the fund had been drawn. Starting in 1999, at the urging of the University's outside auditors, an attempt has been made to more closely mark these investments to market. Accordingly, the two-year and 75% test have been dropped.

The Investment Office continues to review and document the valuation method of the manager, and the Accounting Services unit certifies the valuation process as reasonable and as in compliance with GAAP.

Risk Management

The Investment Committee recognizes the inevitability of the assumption of risk in the management of the University's portfolio. By its various policies and controls it seeks a prudent balance between an investment's risk and its potential reward. The portfolio is diversified across both the public and private capital markets so as to minimize its overall volatility, especially in extremely adverse market conditions. Portfolio risks are quantitatively monitored using risk analysis software packages as well as various statistical methods.

Each July at the Annual Meeting, the Investment Office will seek reaffirmation of the Investment Policy Statement and in addition will report on the status of its risk management efforts including an annual update of the following:

- Derivatives Report and Leverage Report
- Concentration Limits
- Manager File - Compliance Audit

Operational Issues

Any significant changes in operational practices will be reported at the next Investment or Sub Committee meeting (whichever comes first) or at meeting specifically called for that purpose. In addition, a formal detailed written report will be submitted annually concerning exposures and present practices concerning the following:

Derivatives - The University believes that derivatives, properly employed, represent a useful financial and management tool. Not surprisingly this view is shared by a number of the University's external managers. The Investment Office is responsible for continually monitoring and controlling the use of derivatives throughout the portfolio.

Securities lending - The University no longer participates in Securities Lending programs.

Leverage - The internally managed portfolios do not use leverage. While they don't use leverage at the portfolio level, all of the Private Equity and Real Estate managers employ some leverage at the individual investment level. In addition most of the Hedge Fund managers use some leverage. In each case this leverage is understood to be an integral part of the underlying strategy and it is closely monitored.

Shorts - The University's use of short selling is limited to its Hedge fund managers. In Q1 of 2000 the Investment Office made an extensive review of alternative ways to hedge its IPO "pipeline". To date, no decision has been made to implement these strategies.

Concentration Limits - The Investment Office has developed concentration guidelines for the portfolio. These guidelines are reviewed annually by the Investment Committee and are subject to exception reporting during the interregnum.

Market Timing - The University does not believe it has sufficient insights to time the markets successfully and therefore is typically fully invested. It does, however, believe that from time to time markets get sufficiently over or under valued to provide unusual opportunities or risks. In appropriate cases the University will attempt to exploit these anomalies.