William E. Sullivan, Treasurer and Chief Financial Officer

FC 2/26/16 OFFICE OF THE TREASURER AND CHIEF FINANCIAL OFFICER To: Fr: Members of the Finance Committee Don Thompson, Chair Sonny Beck Vanessa Castagna Mike Klipsch William E. Sullivan, Treasurer and Chief Financial Officer Date: February 15, 2016 Re: Annual Report of the Investment Committee Enclosed for your review is the Annual Report of the Purdue Investment Committee, which summarizes the Endowment and reports on the comparative performance results from the NACUBO Endowment Study for the fiscal year ending June 30, 2015. David Cooper and Jim Almond will review the comparative points from the NACUBO Endowment Study at the Finance Committee meeting on February 26, and provide additional information about the positioning of the current asset allocation. For fiscal year 2016, we plan to present the annual report of the investment committee in the fall of this year, instead of waiting until the spring with the release of the NACUBO Endowment Study. Once the study has been received, we will forward a supplemental report for your review. Please call me (765) 494-9705, Jim Almond (765) 494-9706 or David Cooper (765) 588-5483 if you have any questions or would like additional information. Enclosures c: Chairman Mike Berghoff President Mitch Daniels Assistant Treasurer Jim Almond Corporate Secretary Janice Indrutz Senior Vice President Scott Seidle Chief Investment Officer David Cooper Hovde Hall 610 Purdue Mall West Lafayette, IN 47907-2040 (765) 494-9705

2015 Annual Report of the Investment Committee

Executive Summary National Association of College and University Business Officers and Commonfund Institute (NACUBO) Fiscal Year 2015 Survey Results and Review At $2.4 billion, Purdue has the 34 th largest endowment among over 800 United States and Canadian institutions surveyed. Purdue ranks 7 th largest among the 14 Big Ten Universities. Purdue s fiscal year 2015 net of fees return of 2.4 percent, is in line with all institutions surveyed but less than the 4.3 percent return average of funds greater than $1 billion. Purdue s three, five and ten year annualized returns are close to top quartile and exceed the average of all public endowments as well as all private colleges and universities. Purdue s underweight to private equity, venture capital and real estate compared to other institutions with assets exceeding $1 billion explains the vast majority of difference of the 1.9 percent delta of 4.3 percent versus 2.4 percent. The biggest contributors to Purdue s return in fiscal year 2015 were private equity, private real estate and public equity. The biggest detractors were natural resources and emerging markets equity. Fiscal Year 2016 Performance Update The Endowment is down approximately -7.0 percent fiscal year-to-date (July 1, 2015 January 31, 2016). January results are preliminary at this point. China growth concerns, oil s collapse, a strengthening U.S. dollar, some disappointing corporate revenue and earnings, and U.S. Federal Reserve action anticipation have been the primary drivers of volatility over the last several months. If performance does not change from this point until the end of the fiscal year, the impact of the negative performance is not expected to generate a fiscal year 2016 distribution less than last year due to the rolling twelve quarters average market value calculation utilized. Purdue Endowment Assessment Update The assessment update is on track, having developed a risk and objectives survey, completed several risk analyses, and built a comprehensive model as a part of the overall review process. 1 Page

National Association of College and University Business Officers and Commonfund Institute (NACUBO) Fiscal Year 2015 Survey Results and Review The 2015 Report of the Investment Committee provides a comparison of the Purdue Endowment and the results of the National Association of College and Universities Business Officers and Commonfund Institute (NACUBO) Endowment Study. The Study represents information from over 800 U.S. and Canadian colleges and universities and includes 95 endowments over $1.0 billion. The Study has been used to provide insight into similar pools of capital with similar investment time horizons and spending needs. As of June 30, 2015 (the end of fiscal year 2015), the Purdue Investment Pool s (PIP s) market value of $2.4 billion is comprised of the $1.2 billion University Endowment, the $862.0 million Foundation Endowment, $56.2 million separately held endowments and the $293.0 million Purdue Investment Pool Cash (PIPC) quasi-endowment. Purdue s market value ranked 34 th in the NACUBO Study and is the Big Ten s 7 th largest endowment. Rank Big Ten Universities Assets ($ in Millions) 1) Northwestern University $10,193 2) University of Michigan 9,952 3) Penn State University 3,636 4) Ohio State University 3,634 5) University of Minnesota 3,297 6) University of Wisconsin 2,465 7) Purdue University 2,398 8) University of Illinois 2,388 9) Michigan State University 2,275 10) Indiana University 1,974 11) University of Nebraska 1,538 12) University of Iowa 1,263 13) Rutgers 1,002 14) University of Maryland 986 Purdue s total return of 2.4 percent was slightly higher than the median return of all colleges and universities surveyed but did lag the 4.3 percent average return of those institutions with assets greater than $1 billion. Longer term, Purdue s total return was 10.4 percent, 10.2 percent and 6.7 percent annualized on a three, five and ten year basis, respectively. The longer term returns are within fifty basis points (one half of one percent) of top quartile and exceed the performance of the median of all institutions, all public endowments, and all private colleges and universities as seen below. Over every time frame shown in the table below, Purdue s return has outperformed its target benchmark. 2 Page

When looking at the objective of achieving spending plus inflation, the ten year return slightly underperforms that benchmark of 7.1 percent by 40 basis points (0.4 percent) annually. It should be noted that the impacts of the Great Financial Recession of 2008 and 2009 are still embedded within the ten year returns. The three and five year portfolio returns well exceed spending plus inflation. NCSE Total Return (in Percentages) For Fiscal Years Ended June 30, 2015 One Year Three Year Five Year Ten Year Purdue University 2.4 10.4 10.2 6.7 Top Decile 7.8 11.7 11.1 7.9 Top Quartile 3.7 10.9 10.6 6.9 All Institutions Median 2.2 9.8 9.5 6.2 Public Endowments 2.5 10.1 9.7 6.5 Over $1.0 Billion 4.3 10.8 10.4 7.2 All Private Colleges and Universities 2.4 9.9 9.8 6.3 Target Benchmark* 0.6 9.2 9.3 5.5 *28 percent R3000 + 13 percent MSCI EAFE + 5 MSCI Emerging markets + 25 percent HFRI Diversified Index + 7 percent Cambridge Private Natural Resources Index + 7 percent MSCI World NR Index + 15 percent Barclays Aggregate Bond Index Fiscal year 2015 was a year that demonstrated the need for one of investing s basic tenets, diversification. The range of asset class returns in the Purdue Investment Pool was from +16.5 percent in private equity to -21.7 percent in private natural resources. The economic backdrop in fiscal year 2015 included the following: A strengthening U.S. dollar Fragile global growth The largest global central banks (excluding the United States) easing monetary policy Low inflation globally Substantial decline in energy prices The U.S. Federal Reserve ending quantitative easing and preparing markets for potential forthcoming interest rate increases A debt crisis in Greece reemerging as a concern 3 Page

Purdue Individual Asset Class Returns Private Equity / Venture Capital Private Real Estate U.S. Equity Total Fixed Income Public Real Estate Cash Hedge Funds Global ex U.S. Equity Emerging Markets Equity Private Natural Resources -25.0-20.0-15.0-10.0-5.0 0.0 5.0 10.0 15.0 20.0 Given those themes above, for the most part, asset classes performed as expected. Continued low inflation and stable, slightly positive U.S. growth as well as continued rising private equity valuations, led to private equity and venture capital as the best performing asset class with a return of 16.5 percent. Similarly, private real estate also performed well, advancing 14.1 percent. Although U.S. public equity did not advance as much as last year s 25.3 percent, it did perform respectively up 7.9 percent and outperformed the Russell 3000 Index by 0.6 percent. Interest rates did not fluctuate much during the year and thus, the fixed income portfolio performed close to its yield, earning 2.0 percent, outperforming the Barclays Aggregate Bond Index by 0.2 percent. Public real estate was slightly positive earning 1.2 percent compared to its benchmark which returned -0.4 percent. The U.S. Federal Reserve did not raise interest rates during the fiscal year which resulted in the cash portfolio earning nil. Hedge funds were basically flat, down -0.6 percent. Some energy related positions in the hedge fund portfolios kept performance from moving into positive territory. Both public global ex U.S. equity (-2.0 percent) and emerging markets equity (-4.9 percent) had negative returns. The U.S. dollar strengthening detracted from their returns as did lower commodity prices especially for the emerging market commodity exporters. On a relative basis, the international portfolio outperformed its benchmark, the MSCI EAFE Index, by 2.2 percent while the emerging market portfolio slightly underperformed the MSCI Emerging Markets Index by 20 basis points (0.2 percent). Not surprisingly, the natural resources portfolio performed poorly, returning -21.7 percent for the year. Natural resources play an important role in the Purdue portfolio as an inflationary hedge, unlike fixed income which is a deflationary hedge. When inflation does occur, and it is unknown when that will be, this part of the portfolio should respond well. 4 Page

When assessing attribution of the 4.3 percent return average return of institutions greater than $1 billion compared to Purdue s 2.4 percent, what immediately stands out is Purdue s underweight in the highest performing asset classes of fiscal year 2015. Purdue Asset Allocation Comparison As of June 30, 2015 Asset Class Policy Policy Purdue Over $1.0 Over $1.0 Targets Range Actual Billion Variance U.S. Equity 18.0% 10-35% 21.1% 13.0% 8.1% Non-U.S. Equity 13.0 5-20% 13.8 11.4 2.4 Emerging Markets 5.0 0-10% 6.6 7.6 (1.0) Total Equities 36.0 15-65% 41.5 32.0 9.5 Private Equity 5.0 2.5-7.5% 6.6 15.0 (8.4) Venture Capital 5.0 2.5-7.5% 5.6 7.0 (1.4) Hedge Funds 25.0 10-30% 24.6 21.0 3.6 Real Estate 7.0 2-10% 5.7 7.0 (1.3) Natural Resources 7.0 0-10% 4.4 7.0 (2.6) Total Alternatives 49.0 17-65% 46.9 57.0 (10.1) Fixed Income/Cash 15.0 10-20% 11.6 11.0 0.6 100.0% 100% 100.0% 0.0% Purdue s underweight to private equity, venture capital, and real estate were the largest contributors to the difference in performance. Purdue s underweight to natural resources and emerging markets was not enough to offset the difference. Fiscal Year 2016 (July 1, 2015 January 31, 2016) Performance Update The preliminary return of the Endowment is approximately -7.0 percent seven months into the 2016 fiscal year. Approximately -2.8 percent (preliminary) of the -7.0 percent occurred in the month of January. January was a more significantly volatile month but the thematic catalysts are the same as they were in the third calendar quarter of 2015. China s slowing economy, continued pressure on commodities (especially the energy sector) and some disappointing corporate revenue and earnings reports have all contributed to the volatility and negative performance in the global equity and commodity markets. Since December, the commodity markets and equity markets have been almost completely correlated as depicted below. 5 Page

The dollar has continued to strengthen, putting pressure on emerging market and developed market equities when translated back to dollars. Through December, Purdue s emerging market equities returned -15.7 percent and were down another -6.5 percent in the month of January. International developed equities have fared a similar result returning -7.9 percent fiscal year-todate through December and another -6.9 percent in January. U.S. equities were spared somewhat in the first six months of the fiscal year, returning -2.8 percent but have felt similar pain as international developed markets, posting -5.4 percent returns in January. After raising interest rates 25 basis points in December, it is possible that the U.S. Federal Reserve may not raise rates again in 2016 if the economy and markets continue to be disruptive. Purdue s fixed income portfolio was virtually flat (-0.4 percent) for the first six months of the fiscal year with a similar result in January. If performance were to finish the fiscal year as it stands today, the annual distribution from the Endowment is not expected to be less than last fiscal year, despite the negative performance, all else equal. The spending formula equals multiplying the spending percentage by the average of the previous twelve quarters market values. Averaging the last twelve quarters market values is expected to smooth the distribution amounts from year to year and provide more stability than basing the amount solely on the most current market value. It should be noted, however, that if the negative performance or decreased market value persists, it may negatively impact the distribution amount over time. The investment department continues to monitor the portfolio and investment managers closely. 6 Page

Purdue Endowment Assessment Update The investment assessment update that was presented a couple of months ago, is well underway. We have developed a 48 question investment survey specifically for the Purdue Endowment. The survey is expected to be issued to the Investment Committee, the PRF Finance-Audit Committee and potentially additional constituents. The purpose of the survey is to determine Committee and Board members expectations of objectives and to better understand each members risk tolerance for the Endowment. Once the results are collected and analyzed, a determination can be made of how disparate the members views are and how their perspectives reconcile with the current portfolio s allocation. We have also modeled the portfolio through several different risk lenses and will be sharing the results of the analysis with the Investment Committee and PRF Finance-Audit Committee in the near future. The risk modeling is important because it demonstrates what the Endowment s current risk allocation is and how the portfolio is expected to perform under several scenarios. The risk analysis, in combination with the survey, will give better insight into where the portfolio stands today and where the constituents agree it needs to move going forward. Not only have we modeled the portfolio independently, but we have also built a model that incorporates the investment returns, spending, and gifts received. This model should assist in 7 Page

demonstrating what constitutes a break the glass scenario. It also identifies the levers or variables and their sensitivity which are available to impact assets and spending. Going forward, in order to deliver the annual report in a timelier manner, the report will be presented in the fall, closer to the end of the fiscal year. Once the NACUBO results are published each year in January, a supplemental report will be provided to include those findings. 8 Page