STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES. WASHINGTON AND LEE UNIVERSITY The General Endowment Fund. Approved May 2007

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1 STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES WASHINGTON AND LEE UNIVERSITY The General Endowment Fund Approved May 2007 This statement is issued by the investment committee of the board of trustees for guidance in the investment of the assets of the General Endowment Fund (hereafter referred to as the Fund ). The investment committee has also articulated the fundamental investment principles (Attachment A) that provide the foundation for this statement. This statement shall remain in effect until modified by the investment committee as conditions warrant. The responsibility for ensuring the implementation of the policy and guidelines set forth in this statement rests with the investment committee. The policy and objectives provided herein apply to the overall managed endowment fund; specific guidelines for individual accounts managed by investment advisors may be attached. The investment committee will also use this statement as a guide in the monitoring and evaluation of any commingled pools in which the fund may invest. A. Financial and Investment Objectives 1. The university's financial objective for the Fund is to preserve and enhance its real (i.e., inflation-adjusted 1 ) purchasing power while providing a relatively predictable, stable, and constant stream of earnings in line with spending needs. 2. The university s primary investment objective for the Fund is to attain a real total return in excess of spending from endowment over the long term. A secondary investment objective is to earn long-term returns that equal or exceed the mean return earned by an appropriate universe of university and college endowments. B. Spending Policy The Board-approved regular spending formula for the Endowment Fund provides for: 1. Spend the lesser of either the prior-year allocation incremented by a Consumer Price Indexbased inflator or 6% of the three-year average of market values at December 31, which is then tested against a ceiling related to the current market value. 1 The index to be used in all calculations of inflation is the CPI(U).

2 Washington and Lee University Statement of Investment Policies and Objectives Page 2 of 6 C. Long-Term Asset Allocation 1. The Fund s investment asset allocation should reflect a proper balance of the university s investment objective, risk tolerance, and need for liquidity. The investment committee understands that, based on historical returns, a high allocation to equities is required to support the university s spending, while preserving or enhancing the purchasing power of the Fund. A high commitment to equities may result in higher short-term volatility and also may result in periods of diminished purchasing power. However, the asset allocation aims to mitigate some portfolio volatility by diversifying and allocating funds to asset classes whose returns are less correlated over time. 2. To achieve its investment objectives, the Fund s assets are divided into two primary components: a fixed income fund and a diversified equity fund. 3. The main purpose of the fixed income fund is to provide a hedge against the effects of a prolonged economic contraction. Secondary purposes are to reduce the overall volatility of the Fund s returns, to provide liquidity, and to contribute to overall return. 4. The purpose of the diversified equity fund is to provide appreciation of principal and, to a lesser extent current income, to support spending requirements and, potentially, the increased purchasing power of the Fund. The diversified equity fund may be invested in public equities, private equities, hedge funds, real estate, natural resources (oil and gas, timber, etc.), and other equity investments or equity substitutes. 5. The policy portfolio s allocation to cash should normally be zero, but this does not preclude maintaining a cash reserve for operational spending or pending subsequent investment.

3 Washington and Lee University Statement of Investment Policies and Objectives Page 3 of 6 6. a. The short-term target allocations (2-3 year time frame; established in February 2007) for the Fund s policy portfolio are as follows: ALLOCATION ALLOCATION RANGE TARGET EQUITY Global Equity U.S. Common Stocks % 15.0 % Global ex-u.s. Common Stocks Emerging Markets Equity Venture Capital Private Equity Subtotal Global Equity % 50.0 % Hedge Funds % 20.0 % Real Assets Real Estate % 7.5 % Natural Resources Subtotal Real Assets % 17.5 % Total Diversified Equity Fund % 87.5 % FIXED INCOME U.S. Fixed Income % 8.3 % Non-U.S. Fixed Income Subtotal Fixed Income % 12.5 % CASH % 0.0 % TOTAL FUND %

4 Washington and Lee University Statement of Investment Policies and Objectives Page 4 of 6 b. The long-term target allocations (5-10 year time frame; established in February 2007) for the Fund s policy portfolio are as follows: ALLOCATION ALLOCATION RANGE TARGET EQUITY Global Equity U.S. Common Stocks % 10.0 % Global ex-u.s. Common Stocks Emerging Markets Equity Venture Capital Private Equity Subtotal Global Equity % 50.0 % Hedge Funds % 20.0 % Real Assets Real Estate % 7.5 % Natural Resources Subtotal Real Assets % 17.5 % Total Diversified Equity Fund % 87.5 % FIXED INCOME U.S. Fixed Income % 8.3 % Non-U.S. Fixed Income Subtotal Fixed Income % 12.5 % CASH % 0.0 % TOTAL FUND %

5 Washington and Lee University Statement of Investment Policies and Objectives Page 5 of 6 7. For purposes of performance measurement, the returns of the Fund will be measured against a custom benchmark composed (where possible) of indexes that serve as reasonable proxies for the asset classes contained in the policy portfolio. However, the performance of individual managers within those asset classes may be measured against more specific style or sector indexes, as appropriate. The total Fund is thus expected to outperform the performance of a blended benchmark comprised of the returns of the following investable indexes in the weightings indicated: PERFORMANCE BENCHMARK 1 Total Fund Sub-Fund (%) (%) Diversified Equity Fund Russell 3000 Index MSCI EAFE Net Index MSCI EM Net Index Venture Capital/Private Equity Russell % Hedge Funds T-Bills + 6% NCREIF Property Index Wilshire REIT Index Natural Resources to be determined Total Diversified Equity Fund Fixed Income Fund Lehman Brothers Treasury Long Index Citigroup Non-U.S. World Gov t Bond Index Total Fixed Income Fund Total Fund The following are the full names of the indexes abbreviated above: Morgan Stanley Capital International (MSCI) Europe, Australasia and Far East (EAFE) Net and Emerging Markets (EM) Net Indexes, and National Council of Real Estate Investment Fiduciaries (NCREIF) Property.

6 Washington and Lee University Statement of Investment Policies and Objectives Page 6 of 6 D. Short-Term (Strategic) Asset Allocation 1. The policy portfolio serves as a guide to long-term target asset allocations and the committee will tend to balance the portfolio toward those target allocations generally through the deployment of new cash inflows. 2. However, at times the investment committee may also decide to overweight/underweight certain asset classes relative to long-term target allocations on the basis of relative valuations and current investment opportunities. E. Guidelines for Diversified Equity Fund Managers 1. The investment objective for the diversified equity fund is to exceed the equity benchmark composite (as defined in C.7 above) by 1% (100 basis points) over a full market cycle, net of fees. In pursuit of this objective, the performance of each equity manager will be measured against an appropriate equity index and against an appropriate manager peer group. 2. Equity managers may at their discretion hold investment reserves of either cash equivalents or bonds (including convertible issues) without limitation in terms of asset size or period of time, but with the understanding that performance will be measured against common stock indexes as described in Paragraphs C.7 and E.1 above. Under certain conditions specific managers may be given more limited directions by the investment committee. To the extent that cash equivalents are used, their quality should be governed by the guidelines set forth in Attachment B. F. Guidelines for Fixed Income Fund Managers 1. The structure of the fixed income fund portfolio is to provide protection from economic contraction through the use of U.S. Treasuries and agency bonds (subject to limitations set forth in Attachment C), international sovereign debt instruments, and corporate bonds. The performance of each fixed income fund manager will be measured against an appropriate bond manager universe. G. Guidelines for Transactions 1. Except under unusual circumstances, all transactions should be entered into on the basis of best execution, which means best realized net price. Notwithstanding the above, commissions may be designated for payment of services rendered to the Fund in connection with its management.

7 Washington and Lee University Statement of Investment Policies and Objectives Page 7 of 6 H. Monitoring of Objectives and Results 1. All objectives and policies remain in effect until modified by the investment committee, which intends to review them at least annually for their continued appropriateness. 2. The deployment of both individually managed portfolios and total Fund assets will be monitored for consistency of investment philosophy, return relative to objectives, and investment risk as measured by asset concentration, exposure to extreme economic conditions, and market volatility. The investment committee, in-house investment staff, and external investment consultant will be engaged in proactively seeking information concerning existing investment managers and current market trends. Individually managed portfolios will be monitored on an on-going basis, but results will be evaluated on a rolling three/five-year basis. Total Fund results will also be evaluated on a rolling three/five-year basis. In addition, however, the investment committee will regularly review the performance and practices of external managers to confirm that its expectations for each manager are being met. 3. External managers will report the following information quarterly: total return net of all commissions and fees; additions to and withdrawals from the account; current holdings at cost and at market; and purchases and sales for the quarter. Regular written communications outlining the manager's evolving investment strategy are also expected and managers should be available for periodic consultation with the investment committee. In addition, managers are required to inform the committee of any material change in firm ownership, organizational structure, key personnel, account structure (i.e., number and size of accounts, including minimum account size) and investment philosophy.

8 Attachment A FUNDAMENTAL INVESTMENT PRINCIPLES The University s Statement of Investment Policies and Objectives is based on certain investment principles the investment committee of the board of trustees regards as fundamental and constant. The committee s intent is to manage the university s endowment assets in accordance with these principles, regardless of cyclical ebbs and flows in the capital markets, and this documentation of these principles is intended to ensure continuity of purpose and implementation regardless of changes in the composition of the committee. 1. TIME HORIZON. On the one hand, the endowment s investment time horizon should be infinite, since the University is expected to exist in perpetuity. On the other hand, the purpose of the endowment is to provide a steady and sustainable distribution of funds to the operating budget, which means that large fluctuations in endowment market value over shorter time periods are highly undesirable. In setting asset allocation policy, the committee will attempt to mediate between these conflicting time horizons. 2. SPENDING. The ideal endowment spending policy ensures a balancing of priorities, whereby the current needs of the University are not sacrificed in the interests of the future, nor are future needs sacrificed to those of the present. 3. ALLOCATION TO EQUITIES. A high allocation to equities is required to support spending while preserving the purchasing power of the endowment. The committee understands that a high commitment to equities may result in periods of diminished purchasing power and higher short-term volatility. 4. DIVERSIFICATION. By allocating funds to asset classes whose returns are not highly correlated over time, the University aims to mitigate some of the volatility inherent in equities and thereby provide greater stability in spending distributions than might be possible with a more concentrated portfolio. Although such diversification means the University may not reap all of the benefits of equity bull markets, it is intended to also avoid the full brunt of bear markets. The investment committee strives to be on the forefront of changes in the investment market. Additionally, the University seeks to invest with investment managers who are perceived to be the best and the brightest in their field in the opinion of the investment committee. 5. REBALANCING. In order to reap the benefits of diversification and maintain a relatively constant risk exposure, portfolio holdings will likely be rebalanced using normal cash flow to ensure that the actual portfolio asset allocation does not deviate materially from policy target allocations. The investment committee will review asset allocations at each meeting and rebalance as appropriate. 6. PURPOSE OF THE ALLOCATION TO FIXED INCOME. The primary purpose of the fixed income portfolio is to help maintain spending distributions from the endowment during a period of prolonged economic contraction, without having to sell equities at depressed prices to do so. To realize this objective, the bond portfolio must consist predominantly of high-

9 quality issues that are unlikely to generate superior returns during most periods. 7. PURPOSE OF THE ALLOCATION TO INFLATION-HEDGING ASSETS. The primary purpose of the allocations to real estate and natural resources is to hedge the portfolio against unanticipated inflation, which can dramatically decrease the endowment s purchasing power and its ability to sustain spending. Portfolio diversification is an important secondary consideration. 8. HIRING MANAGERS. Investment managers are hired to fulfill specific roles in the portfolio. They are evaluated by the investment committee among a broad universe of comparable candidates and relative to their likely effect on the structure of the endowment s portfolio as a whole. The committee recognizes that managers should not be selected on the basis of recent performance, but on their longer-term record and also on the basis of other dimensions, such as personnel, research capabilities, back office systems, and fees, to name a few. 9. FIRING MANAGERS. Similarly, managers should not be terminated for poor performance over a few years. Terminations within a period of at least three years should be predicated on something other than performance; for example, fundamental changes in the manager s personnel or organization; a failure to fulfill the mandate for which the manager was hired; evidence of illegal or unethical behavior; or a decision by the University to cease investing in the manager s asset class. 10. INVESTMENT POLICY REVIEW. It is expected that the investment committee plans to review the endowment s investment policy annually. While it is not anticipated that the investment policy will be changed frequently, the committee should review the policy periodically to ensure that the endowment is capitalizing on available market opportunities.

10 Attachment B Appropriate Cash Equivalent Investments 1. "Cash equivalent investments" are defined as fixed income instruments with maturities of one year or less. 2. Permissible cash equivalent instruments are: a. Direct obligations of the United States. b. Obligations unconditionally guaranteed as to payment of principal and interest by the United States government. c. Negotiable certificates of deposit, bankers' acceptances and floating rate notes issued by, or time deposits placed with, banks meeting the following criteria: i. U.S. chartered banks must have debt ratings of "A" or higher, ready access to world capital markets, a demonstrated record of profitability (including the avoidance of recent major loan losses), and a sizeable ongoing C.D. issuance or deposit collection program. ii. Foreign chartered banks must be domiciled in nations with strong economies, established capital markets, and central banks able to exercise effective control of domestic monetary movements. Instruments must be recognized as direct obligations of such banks, not as obligations of their subsidiaries. d. A1-P1 Commercial Paper issued by large companies domiciled in the U.S. or abroad. Instruments issued by state-owned companies must be guaranteed by the government owner. e. Repurchase Agreements secured by U.S. government and Federal Agency obligations, such obligations to be priced at least 102% of market value. f. Money Market Funds of commercial banks and other major investment advisors.

11 Attachment C Appropriate Fixed Income Securities for Hedging Against the Effects of Prolonged Economic Contraction 1. The fixed income portfolio can include: a. U.S. Treasuries of varying durations; b. Agency securities of Government Sponsored Enterprises, which cannot exceed 50% of the Laddered Treasuries portfolios; c. International sovereign debt; and d. Corporate bonds.

12 Attachment D Why Diversify the Equity Fund and Fixed Income Fund? Among endowment funds, historically there have been two main approaches to investment policy that have proven successful: 1. The first is to maintain a high allocation to common stocks and to maintain that allocation through thick and thin, trimming spending from the endowment during those periods when portfolio value declines severely. 2. The other approach is to diversify the portfolio among several asset classes, whose returns are not highly correlated over time, with the idea that although the institution may not reap all the benefits of a bull market in stocks, it is also intended to not bear the full brunt of bear markets. By diversifying among asset classes and rebalancing towards target allocations, the investment committee strives to maintain a higher degree of stability in the endowment and therefore to provide stability in providing support of the University s operations. Under the University s investment policy, asset class diversification (approach #2 above) is the governing principle.

13 Attachment E Benefits Achieved Through Portfolio Diversification Increasingly institutional investors are diversifying their portfolios by investing in different kinds of equity investments. Diversification has the following benefits: - Reducing the variability of returns of the total portfolio. It has this effect because returns on different kinds of investments do not always move in tandem (i.e., are not perfectly correlated). The addition of asset classes whose returns are not highly correlated with those of existing portfolio investments can result in a reduction in total portfolio volatility even if the additions are themselves more volatile. Reducing the variability of returns helps to stabilize the spending stream. - Improving returns. If two portfolios have exactly the same arithmetic (simple) average return, one with less variability of return will have a higher compound growth rate. A portfolio with the same arithmetic average return as a less volatile portfolio will have a lower compound average return, as illustrated by the following example: Return Arithmetic Average Compound Average Year 1 Year 2 Return Return Portfolio #1 0% 40% 20% 18.3% Portfolio #2 40% 0% 20% 18.3% Less Volatile Portfolio 20% 20% 20% 20.0% The greater the variability of returns, the wider the gap between the arithmetic average and the compound average return.

14 Portfolio variability and returns are dependent on the correlation of asset classes in the portfolio. A portfolio s variability will be lower, and the compound average return (median growth rate) higher the lower the correlation among asset classes. The arithmetic average return (expected return) remains the same, regardless of the correlation. The following example illustrates this relationship using a two asset class portfolio: 50% Asset A / 50% Asset B Expected Expected Median Return (%) Risk (%) Growth Rate (%) Asset A 12.0% 20.0% 10.0% Asset B Correlation Arithmetic Average Return Portfolio Variability Compound Average Return