INVESTMENT OBJECTIVES AND POLICY

Summary

The Investment Committee has reviewed the Investment Objectives and Policy Guidelines for the Oregon State Board of Higher Education Pooled Endowment Fund. The Investment Committee, with the assistance of OUS staff and R.V. Kuhns and Associates, has drafted a revised policy.

Since the Oregon Investment Council (OIC) has ultimate authority over all state investments, any actions by the Board would need to be approved by the OIC, as noted in the following Investment Objectives and Policy Guidelines.

The Investment Committee recommends that the Board approve for recommendation to the OIC the following Investment Objectives and Policy Guidelines for the OUS pooled endowment funds.

Final Draft Version

OREGON STATE BOARD OF HIGHER EDUCATION POOLED ENDOWMENT FUND

Investment Objectives and Policy Guidelines

I. INTRODUCTION

This statement governs the investment of the Pooled Endowment Fund (the "Fund") of the Oregon State Board of Higher Education (the "Board") of the Oregon University System ("OUS").

This statement is set forth in order that the Board, the Investment Committee, its investment advisor, its investment managers, and others entitled to such information may be made aware of the Policy of the Fund with regard to the investment of its assets. This statement of investment policy is set forth in order that:

1. There be a clear understanding by the Board, Investment Committee, and staff, of the investment goals and objectives of the portfolio.

2. The Board and management have a basis for evaluation of the investment managers.

3. The investment managers be given guidance and limitations on investing the funds.

It is intended that these objectives be sufficiently specific to be meaningful but flexible enough to be practical. It is expected that the policy and objectives will be amended from time to time to reflect the changing needs of the endowment; however, all modifications will be in writing and approved by the Board.

II. OREGON UNIVERSITY SYSTEM POOLED ENDOWMENT FUND

The Oregon University System Pooled Endowment Fund (Fund) is a permanent fund and is expected to operate in perpetuity, so these funds will be invested long-term. It is important to follow coordinated policies regarding spending and investments to protect the principal of the funds and produce reasonable total return.

III. RESPONSIBILITY OF THE BOARD

The responsibility of the Board is to define and to recommend to the OIC broad investment guidelines, selection of investment managers, and determination or approval of asset allocation.

IV. INVESTMENT COMMITTEE RESPONSIBILITY

The Investment Committee serves as advisory to the Board and will have the responsibility and authority to oversee the investments of the Fund. The Investment Committee will recommend to the Board a specific asset mix reflecting judgments as to the investment environment as well as the specific needs of the Fund. Other advisory responsibilities of the Investment Committee will include:

V. SPENDING POLICY

The amount of endowment return available for spending (distribution) is based on a percentage of the average unit market value of the 20 quarters preceding the current fiscal year. The distribution per unit (under Exhibit A) is determined by the Board as recommended by the Investment Committee. The distribution amount per unit is multiplied by the current number of units and any additional units added during the current year as new endowment money comes into the Fund. This shall be exclusive of investment management fees.

VI. INVESTMENT POLICY GUIDELINES

The Board does not expect the Investment Committee to be reactive to short-term investment developments, recognizing that the needs for payout are long-term and that investment competence must be measured over a meaningful period of time. While the quantitative assessment of managerial competence will be measured over a complete market cycle, the Board anticipates that the Investment Committee will make interim qualitative judgments. Specific qualitative factors which will be reviewed by the Investment Committee on an ongoing basis include any fundamental changes in the manager's investment philosophy, any changes in the manager's organizational structure, financial condition and personnel, and any change, relative to their peers, in the manager's fee structure.

A. Asset Allocation

The most important component of an investment strategy is the asset mix, or the resource allocation among the various classes of securities available to the Fund. The Investment Committee will be responsible for target and actual asset allocation for the investments that will best meet the needs of the Fund, taking into consideration the appropriate level of portfolio volatility.

The risk/return profile shall be maintained by describing a long-term "target" strategic asset allocation and is set forth in Schedule I of this Policy.

B. Investment Time Horizon

In making investment strategy decisions for the Fund, the focus shall be on a long-term investment time horizon that encompasses a complete business cycle (usually three to five years). Interim evaluation will be required if a significant change in fees, manager personnel, strategy or manager ownership occurs.

C. Statement of Derivatives Policy

A derivative is defined as a contract or security whose value is based on the performance of an underlying financial asset, index, or other investment. An investment manager shall not use derivatives to increase portfolio risk above the level that could be achieved in the portfolio using only traditional investment securities. Moreover, an investment manager will not use derivatives to acquire exposure to changes in the value of assets indices that, by themselves, would not be purchased for the portfolio. Under no circumstances will an investment manager undertake an investment that is non-covered or leveraged to the extent that it would cause portfolio duration to exceed limits specified above. The investment manager will report on the use of derivatives on a quarterly basis to the administrative manager.

VII. PRUDENCE, RESPONSIBILITIES AND CONTROLS

A. Prudence

All participants in the investment process shall act responsibly. The standard of prudence to be applied by the Board, Investment Committee, OUS staff responsible for the management of investments, and external service providers shall be the "prudent investor" rule, which states: "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived."

B. Ethics and Conflicts of Interest

Board members, Investment Committee members, OUS staff responsible for the management of investments, managers and advisors involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program or that could impair their ability to make impartial decisions. These parties are required to reveal all relationships that could create or appear to create a conflict of interest in their unbiased involvement in the investment process.

VIII. INVESTMENT OBJECTIVES

The investment objective of the Fund is to seek consistency of investment return with emphasis on capital appreciation over long periods of time, since the Fund will operate in perpetuity. In keeping with the performance goals included in the Policy, achievement of this objective shall be done in a manner that maintains the purchasing power of the principal. The Investment Committee shall set the goal for maintaining the purchasing power of the principal value of the assets (under Exhibit A). Under no circumstance shall the principal, as adjusted for inflation, be diminished.

IX. MANAGER(S) RESPONSIBILITIES

A. Legal Compliance

The investment manager(s) is responsible for strict compliance with the provisions of the prudent investor rule as it pertains to their duties and responsibilities as fiduciaries.

B. Evaluation Timetable

The manager(s) will be expected to provide to the OIC, State Treasurer's Office, Board, Investment Committee, and their investment advisor/consultant on a timely basis each quarter such data as is required for proper monitoring. In addition, the manager(s) will provide to the investment advisor/consultant transaction registers and portfolio valuations, including cost and market data on a monthly basis.

C. Authority of Investment Manager(s) in the Managed Accounts

Subject to the terms and conditions of this Policy, manager(s) shall have full discretionary authority to direct investment, exchange and liquidation of the assets of the managed accounts. The Investment Committee expects that the investment manager(s) will recommend changes to this Policy when the manager(s) views any part of this Policy to be at variance with overall market, economic conditions, and relevant investment policies.

The Investment Committee directs all managers to vote proxies and to vote them in the best interest of the Fund. The managers will report to the Investment Committee and their investment advisor/consultant at least annually as to how proxies were voted.

Each investment manager is required to meet with the Investment Committee and their investment advisor/consultant at least annually to review:

X. INVESTMENT ADVISOR/CONSULTANT RESPONSIBILITIES

Investment results will be monitored by an independent consulting organization, under contract by the Board, on a regular basis and reported to the Investment Committee as soon as practicable after each calendar quarter. A representative of the investment advisor/consultant shall meet with the Investment Committee to review for each manager (i) its past performance, (ii) compliance with the Investment Policy, Guidelines and Objectives of the Fund, including but not limited to asset allocation, actual return, and comparative return in relation to applicable index (indices) and to a universe of comparable funds, (iii) risk profile, (iv) ability of manager to fulfill the stated objectives of the funds, and (v) any other material matter. A representative of the investment advisor/consultant shall also report investment results, or other information, to the Board, OIC and others, as requested by the Investment Committee. Any noncompliance with the Investment Policy, Guidelines and Objectives of the Fund or other section of this statement discovered by the investment advisor/consultant will be reported to the Investment Committee immediately.

XI. INVESTMENT GUIDELINES

The Fund shall maintain minimal cash, consistent with short-term requirements.

A. Short-term cash will be invested in the Oregon State Treasurer's Short-Term Investment Pool.

B. Fixed-income securities, for purposes of these guidelines, shall mean mortgage-backed securities, U.S. government securities, investment-grade corporate bonds, and other fixed income securities, such as certificates of deposit and commercial paper. The objective of this component of the Fund is to preserve capital in keeping with prudent levels of risk, through a combination of income and capital appreciation. Realization of income will be subordinate to safety, liquidity, and marketability (securities should be readily marketable). This component of the Fund shall adhere to the following categories:

1. Investment-grade bonds are those bonds rated in the four highest grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A, or Baa) or Standard & Poor's Corporation (AAA, AA, A, or BBB).

2. U.S. Treasury Securities shall consist of bills, notes and bonds. Securities of Federal Agencies and Federally Sponsored Agencies.

Fixed-income managers have full discretion over the allocation between long-term, intermediate, or cash equivalent investments, provided that the duration of any manager's portfolio shall not exceed the duration of the Lehman Aggregate Bond Index by more than one and one-half (1-1/2) years.

C. Equity securities are to be made primarily in well-established, quality companies. The objective specific to this component of the Fund is to maximize long-term total return through a combination of income and capital appreciation. The restrictions pertinent to this portion of the Fund are as follows:

Large-Cap Equity Requirements:

Not more than ten percent of the companies invested in should have market capitalizations less than $1 billion (subject to the large-cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

Small-Cap Equity Requirements:

Investments in smaller companies with market capitalization similar to the Russell 2000 index (subject to the small-cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

International Equity Requirements:

Investments in the equity securities of companies located outside the United States are permitted (subject to the international equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

D. Diversification

1. Not more than five percent of the market value of any investment fund will be invested in any single issue, property, or security. This restriction does not apply to U.S. Government-issued securities.

2. No investment in any single issue, security, or property shall be greater than five percent of the total value of the issue, security, or property.

Performance expectations for each of the asset classes are described in Exhibit A.

XII. OTHER INVESTMENTS

The Board and the Investment Committee recognize that the addition of other investment classes may reduce total fund volatility.

The Board and the Investment Committee may, with the concurrence of the OIC, place up to ten percent of the aggregate Fund assets in venture capital, real estate, distressed securities, and oil and gas partnerships. This allocation is to provide for portfolio diversification.

XIII. OTHER GUIDELINES AND REQUIREMENTS

Custodial responsibility for all securities is to be determined by the Board or its designee(s).

XIV. CONCLUSION

Implementation of this Policy, including investment manager selection, shall be the responsibility of the Investment Committee, subject to the necessary approvals of the Board and the OIC.

This Policy shall be reviewed by the Board at least every two years.

SCHEDULE I

ALLOCATION OF ASSETS

The following represents target asset allocations and the ranges by asset category.
Allocation of asset by class:
Class Target Allocation Ranges
Equity Category 70% 60%-80%
Fixed Income Category 25% 20%-40%
Cash 5% 0%-10%
Alternative Assets 0% 0%-10%

The allocation of equity assets shall be as follows:


Class
Target Allocation

% of Equity



Ranges
Large-Cap Equity 65% 50%-75%
Small-Cap Equity 20% 10%-30%
International Equity 15% 10%-30%

EXHIBIT A

Performance Monitoring Return Expectations

Spending Policy

The distribution rate for the Fund is 5.0 percent of the five-year moving average unit market value.

Total Fund

The total fund will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the level of inflation by 5.0 percent or more as measured by the Consumer Price Index (CPI) over a market cycle;

2. Exceed the median fund in a universe of other endowments over a market cycle. A market cycle is defined as an investment period lasting three to five years.

U.S. Equities - Large Capitalization

Equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the return of the S&P 500 Index by 0.25 percent (after fees) over a market cycle; and

2. Rank at or above median of a nationally recognized universe of equity managers possessing a similar style;

U.S. Equities - Small Capitalization

Small capitalization accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Equal the return of the Russell 2000 (before fees) over a market cycle;

International Equities

International equity accounts will be evaluated quarterly. Specific objectives include, by may not be limited to, the following:

1. Exceed the Return of the EAFE Index by 1.0 percent (after fees) over a market cycle; and

2. Rank in the 40th percentile of a nationally recognized universe of equity managers possessing a similar style;

Fixed Income

Fixed income accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the Return of the EAFE Index by 1.0% (after fees) over a market cycle.

2. Rank in the 40th percentile of a nationally recognized universe of fixed income managers possessing a similar style.

Approved by the Investment Committee on October 5, 1999.

Original Version with Changes

Added language in bold; deleted/relocated language in [brackets]

OREGON STATE BOARD [SYSTEM] OF HIGHER EDUCATION POOLED ENDOWMENT FUND

Investment Objectives and Policy Guidelines

I. INTRODUCTION

This statement governs the investment of the Pooled Endowment Fund (the "Fund") of the Oregon State Board of Higher Education (the "Board") of the Oregon University System ("OUS").

[This statement documents for investment managers the policy of the Board with regard to the investment of the Fund's assets, the investment objectives, and the expectations and requirements with respect to the managers' performance.]

This statement is set forth in order that the Board, the Investment Committee, its investment advisor and its investment managers and others entitled to such information may be made aware of the Policy of the Fund with regard to the investment of its assets. This statement of investment policy is set forth in order that:

1. There be a clear understanding by the Board, Investment Committee and staff, of the investment goals and objectives of the portfolio.

2. The Board and management have a basis for evaluation of the investment managers.

3. The investment managers be given guidance and limitations on investing the funds.

It is intended that these objectives be sufficiently specific to be meaningful but flexible enough to be practical. It is expected that the policy and objectives will be amended from time to time to reflect the changing needs of the endowment; however, all modifications will be in writing and approved by the Board.

II. OREGON UNIVERSITY SYSTEM POOLED ENDOWMENT [THE] FUND

The Oregon University System Pooled Endowment Fund (Fund) is a permanent fund and is expected to operate in perpetuity, so these funds will be invested long-term. It is important to follow coordinated policies regarding spending and investments to protect the principal of the funds and produce reasonable total return.

III. RESPONSIBILITY OF THE BOARD

The responsibility of the Board is to define [(with the concurrence of the Oregon Investment Council [OIC])] and to recommend to the OIC broad investment guidelines, selection of investment managers, and determination or approval of asset allocation. [The investment managers are responsible for optimizing the return on assets within these guidelines.]

[The Board will assure that a procedurally prudent investment process is followed. The elements included in, but not limited to, this process are an asset allocation strategy that addresses risk/reward considerations, a written statement of investment policy, selection of "prudent experts" or money managers charged with implementation of investment decisions, control of the investment expenses, monitoring the performance of investment managers and other service providers, and identifying and avoiding conflicts of interest.]

IV. INVESTMENT COMMITTEE RESPONSIBILITY

The Investment Committee serves as advisory to the Board and will have the responsibility and authority to oversee the investments of the Fund. The Investment Committee will recommend to the Board a specific asset mix reflecting judgments as to the investment environment as well as the specific needs of the Fund. Other advisory responsibilities of the Investment Committee will include:

To assist in this process, the Board may retain a registered investment advisor/ consultant. The duties of this investment advisor/consultant are in Section X.

V. SPENDING POLICY

The amount of endowment return available for spending (distribution) is based on a percentage of the average unit market value of the 20 quarters preceding the current fiscal year. The [current year] distribution per unit (under Exhibit A) is determined by the Board [and is currently 5.5 percent of the five year moving average unit market value] as recommended by the Investment Committee. The distribution amount per unit is multiplied by the current number of units and any additional units added during the current year as new endowment money comes into the Fund. This shall be exclusive of investment management fees.

VI. INVESTMENT POLICY GUIDELINES

The Board does not expect the Investment Committee to be reactive to short-term investment developments, recognizing that the needs for payout are long-term and that investment competence must be measured over a meaningful period of time. While the quantitative assessment of managerial competence will be measured over a complete market cycle, the Board anticipates that the Investment Committee will make interim qualitative judgments. Specific qualitative factors which will be reviewed by the Investment Committee on an ongoing basis include any fundamental changes in the manager's investment philosophy, any changes in the manager's organizational structure, financial condition and personnel, and any change, relative to their peers, in the manager's fee structure.

A. Asset Allocation

The most important component of an investment strategy is the asset mix, or the resource allocation among the various classes of securities available to the Fund. The Investment Committee will be responsible for target and actual asset allocation for the investments that will best meet the needs of the Fund, taking into consideration the appropriate level of portfolio volatility.

The risk/return profile shall be maintained by describing a long-term "target" strategic asset allocation and is set forth in Schedule I of this Policy.

B. Investment Time Horizon

In making investment strategy decisions for the Fund, the focus shall be on a long-term investment time horizon that encompasses a complete business cycle (usually three to five years). Interim evaluation will be required if a significant change in fees, manager personnel, strategy or manager ownership occurs.

C. Statement of Derivatives Policy

A derivative is defined as a contract or security whose value is based on the performance of an underlying financial asset, index, or other investment. An investment manager shall not use derivatives to increase portfolio risk above the level that could be achieved in the portfolio using only traditional investment securities. Moreover, an investment manager will not use derivatives to acquire exposure to changes in the value of assets indices that, by themselves, would not be purchased for the portfolio. Under no circumstances will an investment manager undertake an investment that is non-covered or leveraged to the extent that it would cause portfolio duration to exceed limits specified above. The investment manager will report on the use of derivatives on a quarterly basis to the administrative manager.

VII. PRUDENCE, RESPONSIBILITIES AND CONTROLS

A. Prudence

All participants in the investment process shall act responsibly. The standard of prudence to be applied by the Board, Investment Committee, OUS staff responsible for the management of investments, and external service providers shall be the "prudent investor" rule, which states: "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived."

B. Ethics and Conflicts of Interest

Board members, Investment Committee members, OUS staff responsible for the management of investments, managers and advisors involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program or that could impair their ability to make impartial decisions. These parties are required to reveal all relationships that could create or appear to create a conflict of interest in their unbiased involvement in the investment process.

[IV. FUND MANAGEMENT

Recognizing that investment competence must be measured over a complete market cycle, the Board does not expect to react to short-term investment developments. Nevertheless, the Board may act on interim qualitative judgements. Qualitative factors that will be reviewed on an ongoing basis include any fundamental changes in a manager's investment philosophy, any changes in a manager's organizational structure, financial condition (including any significant changes in total assets under management), personnel, and any change, relative to their peers, in the manager's fee structure.]

[V.] VIII. INVESTMENT OBJECTIVES

The investment objective of the Fund is to seek consistency of investment return with emphasis on capital appreciation over long periods of time, since the Fund will operate in perpetuity. In keeping with the performance goals included in the Policy, achievement of this objective shall be done in a manner that maintains the purchasing power of the principal [amount of these assets by exceeding the level of inflation by five percent or more as measured by the Consumer Price Index (CPI)]. The Investment Committee shall set the goal for maintaining the purchasing power of the principal value of the assets (under Exhibit A). Under no circumstance shall the principal, as adjusted for inflation, be diminished.

[Investment portfolio's performance shall exceed the median fund in a universe of other endowment funds over a complete market cycle. A market cycle is defined as an investment period lasting three to five years.]

IX. MANAGER(S) RESPONSIBILITIES

A. Legal Compliance - The investment manager(s) is responsible for strict compliance with the provisions of the prudent investor rule as it pertains to their duties and responsibilities as fiduciaries.

B. Evaluation Timetable - The manager(s) will be expected to provide to the OIC, State Treasurer's Office, Board, Investment Committee and their investment advisor/consultant on a timely basis each quarter such data as is required for proper monitoring. In addition, the manager(s) will provide to the investment advisor/consultant transaction registers and portfolio valuations, including cost and market data on a monthly basis.

C. Authority of Investment Manager(s) in the Managed Accounts - Subject to the terms and conditions of this Policy, manager(s) shall have full discretionary authority to direct investment, exchange and liquidation of the assets of the managed accounts. The Investment Committee expects that the investment manager(s) will recommend changes to this Policy when the manager(s) views any part of this Policy to be at variance with overall market, economic conditions, and relevant investment policies.

The Investment Committee directs all managers to vote proxies and to vote them in the best interest of the Fund. The managers will report to the Investment Committee and their investment advisor/consultant at least annually as to how proxies were voted.

Each investment manager is required to meet with the Investment Committee and their investment advisor/ consultant at least annually to review:

X. INVESTMENT ADVISOR/CONSULTANT RESPONSIBILITIES

Investment results will be monitored by an independent consulting organization, under contract by the Board, on a regular basis and reported to the Investment Committee as soon as practicable after each calendar quarter. A representative of the investment advisor/consultant shall meet with the Investment Committee to review for each manager (i) its past performance, (ii) compliance with the Investment Policy, Guidelines and Objectives of the Fund, including but not limited to asset allocation, actual return, and comparative return in relation to applicable index (indices) and to a universe of comparable funds, (iii) risk profile, (iv) ability of manager to fulfill the stated objectives of the funds, and (v) any other material matter. A representative of the investment advisor/consultant shall also report investment results, or other information, to the Board, OIC and others, as requested by the Investment Committee. Any noncompliance with the Investment Policy, Guidelines and Objectives of the Fund or other section of this statement discovered by the investment advisor/consultant will be reported to the Investment Committee immediately.

[VI. ASSETS GUIDELINES, PERFORMANCE OBJECTIVES, AND DIVERSIFICATION] XI. INVESTMENT GUIDELINES

A. The Fund shall maintain minimal cash, consistent with short-term requirements.

Short-term cash will be invested in the Oregon State Treasurer's Short-Term Investment Pool.

B. Fixed-income securities, for purposes of these guidelines, shall mean mortgage-backed securities, U.S. government securities, investment-grade corporate bonds, and other fixed income securities, such as certificates of deposit and commercial paper. The objective of this component of the Fund is to preserve capital in keeping with prudent levels of risk, through a combination of income and capital appreciation. Realization of income will be subordinate to safety, liquidity, and marketability (securities should be readily marketable). This component of the Fund shall adhere to the following categories:


1. Investment-grade bonds are those bonds rated in the four highest grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A, or Baa) or Standard & Poor's Corporation (AAA, AA, A, or BBB).
2. U.S. Treasury Securities shall consist of bills, notes and bonds.

3. Securities of Federal Agencies and Federally Sponsored Agencies.

Fixed-income managers have full discretion over the allocation between long-term, intermediate, or cash equivalent investments, provided that the duration of any manager's portfolio shall not exceed the duration of the Lehman Aggregate Bond Index by more than one and one-half (1-1/2) years.

[The performance of fixed income securities shall exceed the performance of the Lehman Aggregate Index by 0.50 percent or more after manager fees on a total return basis and shall also exceed the median in a universe of other fixed income portfolios over a market cycle.]

C. Equity securities are to be made primarily in well-established, quality companies. The objective specific to this component of the Fund is to maximize long-term total return through a combination of income and capital appreciation. The restrictions pertinent to this portion of the Fund are as follows:

Large-Cap Equity Requirements:

Not more than ten percent of the companies invested in should have market capitalizations less than $1 billion (subject to the large-cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

[Performance of equity securities shall exceed the S&P 500 Index by one percent or more after manager fees and should exceed the median in a universe of other equity portfolios over a market cycle.]

Small-Cap Equity Requirements:

Investments in smaller companies with market capitalization [less than one billion dollars shall be permitted] similar to the Russell 2000 index (subject to the small-cap equity limitations of [Section VIII.] Schedule I). Portfolios should be comprised of at least 30 security issues. [If such investments are segregated into a separate, smaller company portfolio, the performance of the securities shall exceed the performance of the Russell 2000 Index by one percent or more after manager fees over a market cycle.]

International Equity Requirements:

Investments in the equity securities of companies located outside the United States are permitted (subject to the international equity limitations of [Section VIII.] Schedule I). Portfolios should be comprised of at least 30 security issues. [Performance of non-U.S. international equity portfolios shall exceed the performance of the EAFE (Europe, Australia, and Far East) Index and should exceed the performance of the median in a universe of other actively managed international equity portfolios over a market cycle.]

D. Diversification

1. Not more than five percent of the market value of any investment fund will be invested in any single issue, property, or security. This restriction does not apply to U. S. Government-issued securities.

2. No investment in any single issue, security, or property shall be greater than five percent of the total value of the issue, security, or property.

Performance expectations for each of the asset classes is described in Exhibit A.

XII. OTHER INVESTMENTS

The Board and the Investment Committee recognize[s] that the addition of other investment classes may reduce total fund volatility. [It is the intent of] The Board and the Investment Committee may, with the concurrence of the OIC, place up to ten percent of the aggregate Fund assets in venture capital, real estate, distressed securities, and oil and gas partnerships. This allocation is to provide for portfolio diversification.

[X.] XIII. OTHER GUIDELINES AND REQUIREMENTS

Custodial responsibility for all securities is to be determined by the Board or its designee(s).

[XI. INVESTOR RESPONSIBILITY

The Board is to meet as often as necessary with the investment managers. The frequency of meetings is to be determined in part by the performance evaluation results compared to predetermined objectives and manager characteristics. The Board is to meet with each manager at least once a year.]

[XII. INVESTMENT MANAGERS

The Board, with the concurrence of the OIC, allocates funds to individual managers and from time to time may withdraw funds or reallocate funds between managers. Each manager's performance is to be compared regularly with the performance of the appropriate market indices and with other universe portfolios managed with similar assets in a similar manner. As a general guideline that applies to all assets managed, transactions are to be entered into on the basis of "best execution," which means best realized price.

Subject to the terms and conditions of this Policy, manager(s) shall have full discretionary authority to direct investments, exchange, and liquidate the assets of the Fund. The Board expects that the investment manager(s) will recommend changes to this policy when the manager(s) view any part of this Policy to be at variance with overall market and economic conditions. The Board shall direct all managers to vote proxies in the interest of the Fund.]

XIV. CONCLUSION

Implementation of this Policy, including investment manager selection, shall be the responsibility of the [Board] Investment Committee, subject to the necessary approvals of the Board and the OIC.

This Policy shall be reviewed by the Board at least every two years.

SCHEDULE I
[VIII.] ALLOCATION OF ASSETS

The following represents target asset allocations and the ranges by asset category.
Allocation of asset by class:

Class

[Normal] Target Allocation

Ranges

Equity Category 70% 60%-80%
Fixed Income Category 25% 20%-40%
Cash 5% 0%-10%
Alternative Assets 0% 0%-10%

The allocation of equity assets shall be as follows:


Class

[Normal] Target Allocation
(% of Equity)


Ranges

Large-Cap Equity 65% 50%-75%
Small-Cap Equity 20% 10%-30%
International Equity 15% 10%-30%


EXHIBIT A

Performance Monitoring Return Expectations

Spending Policy

The distribution rate for the Fund is 5.0 percent of the five year moving average unit market value.

Total Fund

The total fund will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the level of inflation by 5.0 percent or more as measured by the Consumer Price Index (CPI) over a market cycle;

2. Exceed the median fund in a universe of other endowments over a market cycle. A market cycle is defined as an investment period lasting three to five years.

U.S. Equities - Large Capitalization

Equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the return of the S&P 500 Index by 0.25 percent (after fees) over a market cycle; and

2. Rank at or above median of a nationally recognized universe of equity managers possessing a similar style;

U.S. Equities - Small Capitalization

Small capitalization accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Equal the return of the Russell 2000 (before fees) over a market cycle;

International Equities

International equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the Return of the EAFE Index by 1.0 percent (after fees) over a market cycle; and

2. Rank in the 40th percentile of a nationally recognized universe of equity managers possessing a similar style;

Fixed Income

Fixed income accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed the Return of the Lehman Aggregate Bond Index by 0.5 percent (after fees) over a market cycle; and

2. Rank in the 40th percentile of a nationally recognized universe of fixed income managers possessing a similar style;

Approved by the Investment Committee on October 5, 1999.

Recommendation to the Board

The Investment Committee recommends that the revised policy be approved as submitted.

BOARD ACTION:

AMENDMENT OF OAR 580-010-0086, ENROLLMENT OF SPOUSE AND DEPENDENT CHILDREN

Staff Report to the Board

On December 9, 1998, the Oregon Court of Appeals ruled, in Tanner v. OHSU, that the denial of benefits to domestic partners of homosexual employees, when those same benefits were available to married employees, violated Article I, Section 20, of the Oregon Constitution. At its April 16, 1999, executive session, the Board received legal advice and conferred with legal counsel regarding the effect of Tanner v. OHSU.

The original language of OAR 580-010-0086 allowed that spouses and dependent children of OUS staff members could enroll as students at OUS institutions at resident fee rates. Since this rule did not provide the same benefits to unmarried domestic partners of homosexual employees as was available to married employees, the rule was deemed inconsistent with the requirements of the Oregon constitution. At the June 18, 1999, meeting of the Board, OAR 580-010-0086 was revised to include temporary language that would bring the rule into conformity with Oregon law. Since that time, further rulemaking procedures were undertaken so that a permanent rule would be in place prior to the expiration of the temporary rule. A public hearing will be conducted on October 19, 1999, in order to receive public comment on the proposed rule change. Additionally, criteria defining "same sex domestic partnership" have been developed and a process established by which individuals may qualify for benefits offered under this rule.

The summary of public comment offered on the proposed rule change will be available at the October 21, 1999, meeting of the Board.

It is more difficult to document the existence of a same sex domestic partnership than it is to document a marriage. Hence, organizations offering benefits to domestic partners have relied on the development of criteria that seek to systematically define what such a relationship is. In the quest to identify criteria that would define domestic partnerships for OUS' purposes, staff researched similar criteria published in other states, as well as the criteria used in defining domestic partnership, for the purposes of receiving health benefits, per the Oregon Public Employees' Benefits Board. The utilization of such criteria offers assurances to both the Oregon University System and its employees that the benefits are offered only to eligible individuals, and that such benefits are distributed in a fair and equitable manner. Based on staff research and consultation, the criteria to be utilized by OUS in defining a same sex domestic partnership, for the purposes of OAR 580-010-0086, follow.

Individuals claiming a same sex domestic partnership must affirm that:

(1) Each are of the same sex and are 18 years of age or older; and

(2) They share a close personal relationship and consider themselves responsible for each other's welfare; and

(3) They are currently each other's sole domestic partner and that neither has had another domestic partner within the preceding six months; and

(4) Neither one is married to another partner nor are they related by blood closer than would bar marriage in the State of Oregon; and

(5) They have jointly shared the same regular and permanent residence for at least six months and have plans to continue this arrangement on an indefinite basis; and

(6) They are jointly financially responsible for basic living expenses defined as the cost of food, shelter, and any other costs associated with the maintenance of a household. (Domestic partners do not necessarily have to share household expenses equally, as long as they agree that both are jointly responsible.)

The process to be followed to receive benefits under the rule follow.

To claim resident tuition rate benefits under this rule, the OUS staff member and his/her same sex domestic partner must complete and sign an "affidavit of domestic partnership" (currently under development, to be available at campus business, registrar, admission, and/or other offices designated by the institution) which is based on the criteria stated above, and submit the affidavit to the designated office of the OUS institution where the domestic partner is enrolled. Resident tuition rates for same sex domestic partners under this rule cannot be offered without a completed and signed affidavit. Supporting documents will not routinely be collected in support of the affidavit. Should questions or challenges to the existence of a valid domestic partnership arise, however, documentary proof to support the claim to domestic partnership would be required. Examples of acceptable documentary evidence include, but are not limited to, the following:

Recommendation to the Board

Staff recommends the Board amend OAR 580-010-0086, Enrollment of Spouse and Dependent Children, as a permanent rule, as follows (new language in bold text):

580-010-0086(1) The spouse and dependent children of regular Department staff members with a full-time equivalent of at least .50 may enroll as students at resident fee rates in Department institutions. Effective January 1, 1999, for purposes of this rule, "spouse" includes the same sex domestic partner of an employee. The Chancellor or designee shall establish criteria to determine domestic partner eligibility.
(2) The spouse and dependent children of Department visiting instructors from other countries or other states with a full-time equivalent of at least .50 may enroll in Department institutions at resident fee rates during the terms that the parent, guardian, or spouse is serving a Department institution as a visiting instructor.

BOARD ACTION: (roll call vote required)

AUTHORIZATION TO AWARD HONORARY DOCTORATE, PSU

Staff Report to the Board

Portland State University requests authorization to award an honorary doctorate to General Colin L. Powell when he visits PSU in November 1999.*

General Powell was born to immigrant Jamaican parents in Harlem. He was educated in the New York City public school system and graduated from the City College of New York with a bachelor's degree in geology. He also participated in ROTC and received a commission as an Army second lieutenant upon graduation from college. His further academic achievements include an MBA degree from George Washington University.

General Powell was a professional soldier for 35 years, during which time he held myriad command and staff positions. His latest assignment was as the 12th Chairman of the Joint Chiefs of Staff, the highest military position in the Department of Defense. During that time, he oversaw 28 crises including Operation Desert Storm in the victorious 1991 Persian Gulf War. General Powell currently serves as chairman of America's Promise--The Alliance for Youth, a national crusade to improve the lives of our country's young people. Established at the President's Summit for America's Future in April 1997, America's Promise aims to ensure that all children in the United States have access to the fundamental resources needed to build and strengthen them to become responsible, productive citizens. General Powell is a member of the board of trustees of Howard University and a member of the board of directors of the United Negro College Fund. General Powell also serves on the board of governors of the Boys and Girls Clubs of America and is a member of the advisory board of the Children's Health Fund.

Besides numerous U.S. military awards and decorations, General Powell has received many civilian awards, including two Presidential Awards of Freedom, the Congressional Gold Medal, and others. In addition, he is the recipient of an honorary knighthood bestowed by H.M. Queen Elizabeth II of Great Britain.

Staff Recommendation to the Board

Staff recommends Board authorization to Portland State University to award an honorary doctorate to General Colin L. Powell at a special event in November 1999.

BOARD ACTION:

* The Board of Higher Education permits institutions, with the concurrence of their faculties, to award honorary degrees. Each institution wishing to award honorary degrees must adopt criteria and procedures for selection that will ensure the award honors distinguished achievement and outstanding contributions to the institution, state, or society. Criteria and procedures for selection must be forwarded to the Chancellor or designee for approval and, when approved, filed with the Secretary of the Board. Institutions are required to forward their recommendations for honorary degrees for the Board's approval 90 days before the award date.

CONFIRMATION OF INSTITUTIONAL DEGREE LISTS

Staff Report to the Board

In accordance with Board regulations, the following members represented the Board in approving candidates for degrees and diplomas for the graduating classes at the designated institutions during the 1998-99 academic year and summer session:

Eastern Oregon University
Diane Christopher

Oregon Health Sciences University
Tom Imeson

Oregon Institute of Technology
Jim Lussier

Oregon State University
Phyllis Wustenberg

Portland State University
Don VanLuvanee

Southern Oregon University
Gail McAllister

University of Oregon
Katie Van Patten
Jim Willis

University of Oregon Law School
David Koch

Western Oregon University
Phyllis Wustenberg

Staff Recommendation to the Board

Staff recommends that the Board confirm the actions of Board members in approving degrees and diplomas.

BOARD ACTION:

MASTER IN BUSINESS INFORMATION SYSTEMS, OSU

Background

In 1997, Oregon legislation (SB 487) increased educational requirements for certified public accountants (CPAs) from 180 quarter hours to 225 quarter hours. This change, which will go into effect January 2000, is aligned with statutory changes in 40 other states and will make it easier for Oregon CPAs to practice in other jurisdictions.

The increased educational requirement essentially constitutes a fifth year of preparation, which may be performed at the postbaccalaureate or master's level. When this statutory change was being considered by the legislature, OUS faculty in business and accounting carefully studied how best to respond. Three OUS institutions (OSU, PSU, and UO) have developed programs responsive to the legislation. The University of Oregon's re-established Master of Accounting has been approved by the Board and will be implemented in fall 1999. Portland State University's M.S. in Financial Analysis is undergoing an external review, after which it will be presented to the Board for final approval. OSU's proposed program, which will be implemented in fall 2000, is described below. Although all three programs have been developed concurrently, each has a slightly different emphasis, providing a broader set of choices for Oregon students.

Staff Report to the Board

Oregon State University requests Board authorization to establish the Master of Business Information Systems (MBIS), with an option in financial systems and analysis. This program targets students with undergraduate degrees in business, specifically those with options in accounting and finance. The program recognizes that, in addition to accounting skills, accountants must understand information systems and possess the ability to perform more complex analyses. This fifth-year graduate degree meets the learning objectives outlined by the Oregon Society of CPAs, as well as fulfilling the educational requirements to be a licensed CPA.

The MBIS has two objectives, the first of which is to provide an advanced education that prepares undergraduate degree holders for careers in accounting, finance, and information systems management. The second objective is to provide an advanced education that enhances the abilities of people already employed in those professions.

Competencies expected, and coursework leading to those competencies, are highly structured and cover such areas as cost management; auditing; budgeting, forecasting, and business planning; taxation, including corporate taxation; valuation methods; risk management; mergers and acquisitions; financial and accounting information systems; data telecommunications and networks; and human and ethical issues. The curriculum has been designed with close assistance from the Management Information Systems Advisory Council and the Accounting Advisory Council in OSU's College of Business. The members of both councils represent industries that hire such graduates.

The program will require the development of 12 new graduate courses. With the addition of three new faculty members and 1.0 FTE support staff, resources will be sufficient to offer this program. Funding will come from monies accruing to the University from students enrolled in the MBIS program.

The enrollment target is 45 new students annually. The program is designed to primarily meet the needs of business baccalaureate graduates, particularly those with accounting, finance, or information systems emphases. The MBIS will secondarily be available to non-business majors, depending on the applicant's qualifications and the program's space availability. Because the program is designed to satisfy the educational requirements of accounting majors, accounting-degree holders will have priority for 20 of the 45 positions in the MBIS program.

Employment prospects are bright for graduates of this program. Increasingly, accounting and finance professionals are expected to possess the skills and abilities to serve as business advisors and business partners, providing a high level of business analysis and decision support. The proposed program will provide just such preparation.

All appropriate University committees and the Academic Council have positively reviewed the proposed program. The external review team stated that it "is impressed with the program concept, curriculum design, and opportunities for success." The team concurred with OSU's assessment of the direction in which accounting and information technology has been evolving, and the team also concurred that there are strong employment prospects for graduates of this program.

Staff Recommendation to the Board

Staff recommends that the Board authorize Oregon State University to establish a program leading to the Master in Business Information Systems. The program would be effective fall 2000, and the OUS Office of Academic Affairs would conduct a follow-up review in the 2005-06 academic year.

BOARD ACTION:

M.S., APPLIED PHYSICS, UO

Staff Report to the Board

The University of Oregon proposes to offer the M.S. degree in Applied Physics, effective fall term 1999. It is designed to serve physics students whose primary interest is applied research and development, rather than basic research. Students with the latter interest may continue to choose the M.S. in Physics for which UO has authorization. This Applied Physics degree will serve as a professional credential that will help graduates obtain jobs in the high-technology industry. In consultation with industry representatives, UO will establish areas of concentration (e.g., optics/electronics or computational focus) so that graduates will have an area of specialized knowledge, thus enhancing their attraction to potential industry employers.

This program requires successful completion of 45 graduate credits. A research practicum or thesis will be required in the student's chosen area of specialization. The practicum may be fulfilled by one of three means: (1) participation in an industrial internship program, (2) development of a new project in the teaching lab, or (3) a research thesis in the UO lab. In the internship or teaching lab option, students will be required to write a high-quality technical report for, and verbally present it to, an applied physics oversight committee. The thesis option will be conventional. In addition to the 9 credits of research practicum, degree requirements include 12 core credits in device physics, 8 core credits in design of experiments, and 16 credits of approved relevant electives. The new courses in this proposal are, in reality, applied revisions of existing courses.

It is anticipated that this program will attract 12 to 15 students per year. Employment prospects for graduates of traditional physics programs have changed during the past decade. State and federal budgetary restrictions, coupled with increased international economic competition, have resulted in fewer research and academic job opportunities. To be viable in the current and projected job market, scientists must have broader training; consequently, communication skills will be emphasized in this program. The required writing portion of the practicum is a technical exposition describing the practicum components, and the expected standard will be the same as that required for publication in a technical journal.

This program is a response to recent widespread criticism leveled at Ph.D. programs, asserting that such programs train students too narrowly and inadequately for careers in the private sector. Students graduating from this program will be prepared in technology-based fields for which existing doctoral degrees do not provide sufficient training. This program, and the OSU program in Applied Physics authorized by the Board in February 1999, is directly responsive to the Associated Oregon Industries' request that OUS produce greater numbers of graduates for this state's high-technology industry.

With faculty in optical science, materials science, solid-state physics, biophysics, high-energy physics, and astrophysics, UO has the versatility and expertise to provide guidance in areas of industry needs. UO also has instructional laboratories and a wide array of state-of-the-art instrumentation to support this program. Additional faculty, facility, and equipment resource needs will be met through internal reallocation in the Physics Department.

All appropriate University committees and the Academic Council have positively reviewed the proposed program. The requirement for an external review was waived because the proposed Applied Physics major does not represent a significant new graduate major.

Staff Recommendation to the Board

Staff recommends that the Board authorize the University of Oregon to establish a program leading to the M.S. degree in Applied Physics. The program would be effective fall term 1999, and the OUS Office of Academic Affairs would conduct a follow-up review in the 2005-06 academic year.

BOARD ACTION:

TWO NEW U.S. DEPARTMENT OF EDUCATION GRANTS

Introduction

Late this summer, the Chancellor's Office was notified by the U.S. Department of Education of the award of two three-year grants: one totaling $4.8 million, the other, $1.4 million. Both grants will further the work of the Oregon University System and its partnerships with other institutions, educational sectors, government agencies, and private enterprise. The larger grant, which Oregon submitted to the Title II Teacher Quality Enhancement Program, is a state grant involving the Governor's Office, the Teacher Standards and Practices Commission (TSPC), the Oregon University System, and numerous other educational partners. The other grant was submitted to the Learning Anywhere Anytime Program (LAAP), whose objective is to provide innovation to distance education and broaden student access to education. Dr. Holly Zanville, Associate Vice Chancellor for Academic Affairs, serves as principal investigator on both grants. Each grant is described in more detail below.

Title II Grant: Oregon Quality Assurance in Teaching Program (O-QAT)

Oregon was one of 24 states (out of 41 that applied) to receive funding for this Title II grant. In spring 1999, a statewide planning committee for O-QAT developed eight goals related to improving teacher licensure preparation and workforce in Oregon. These goals were developed out of the need to align teacher licensure requirements with Oregon's K-12 standards-based school reform plan and to ensure high-quality teacher preparation. The five project objectives are:

O-QAT will strive to achieve six key outcomes:

1. Oregon's capacity to hold 16 institutions (6 public and 10 independent) accountable for high-quality teacher preparation will be enhanced by completion of Institutional Report Cards on new teacher candidates, and a State Report Card, as required by federal legislation.

2. Six thousand teacher candidates completing approved preparation programs leading to the initial licence between 1999 and 2002 (and beyond) will be well-prepared to assume responsibilities as beginning teachers in standards-based classrooms.

3. Performance-based measures for the new continuing license will be developed and pilot tested with several hundred teachers, and will be implemented collaboratively by O-QAT partners.

4. Several model continuing license programs will be implemented by higher education institutions throughout Oregon and widely available to current teachers.

5. Oregon's capacity to address critical teacher shortage areas by 2002 (and in the future) will be enhanced by serving more diverse target populations via new alternative pathway programs.

6. Interagency studies and policy development in teacher quality will be enhanced, leading to more effective statewide planning after the grant.

O-QAT will be advised by an interagency team reporting to the Joint Boards of Education and TSPC. Members will include representatives from the Governor's Office, TSPC, Oregon Department of Education, Office of Community College Services, Oregon Education Association, Proficiency-based Admission Standards System project, and the Teaching Research Division at Western Oregon University. The deans and directors of Oregon's Schools and Colleges of Education, both public and independent, will play a major role in implementing O-QAT initiatives and monitoring progress in meeting O-QAT goals and objectives.

LAAP Grant: Second-Generation University System Distance Education Model via Public/Private Partnerships

The LAAP grant generated large-scale interest nationwide. More than 650 preliminary proposals were submitted; 122 were invited to the final round. OUS is one of only 29 selected for an award.

For nearly a decade, OUS has delivered degree programs via ED-NET. With the state's distance education network changing and student demand increasing for asynchronous education delivery, OUS must transition from first- to second-generation distance education practices, providing "anywhere/anytime" access to courses, programs, and services. This three-year grant will help make that goal a reality.

There are four major project activities:

(No Board action required)

RENAMING OF SOUTH HALL TO BOIVIN HALL, OIT

Summary

The President of Oregon Institute of Technology wishes to report to the Board her decision to rename one of OIT's academic classroom buildings, South Hall, after the late State Senator Harry Boivin, in recognition of the important role he played in OIT's history. OIT plans a dedication ceremony for the spring of 2000.

Staff Report to the Board

OAR 580-050-0025 sets forth the policies concerning naming of campus facilities. No building may be named for a living person unless the Board makes an exception in accordance with the provisions of the OAR. In all other circumstances, a campus president is authorized to name buildings and structures.

In concert with this OAR, President Martha Anne Dow wishes to report her decision to rename South Hall, an academic classroom building at OIT, for the late State Senator Harry Boivin who passed away March 15, 1999, at age 95.

Senator Boivin was trained as an attorney in Oregon. In 1935, he was elected State Representative from Klamath Falls, and subsequently became the youngest Speaker of the House in Oregon history. During World War II, he left the legislature, returning in the 1950s as a member of the Senate. Elected President of the Senate, he was instrumental in securing legislative support and funding to locate the OIT campus in Klamath Falls.

In recognition of Senator Boivin's many contributions, the State Board of Higher Education conferred an honorary doctorate degree to him in June 1992. He received OIT's Greatest Service Award twice, in 1960 and again in 1995. To honor his memory, OIT will hold a renaming dedication ceremony in spring of 2000.

(No Board action required)

ANNUAL REPORT ON INVESTMENTS

Report to the Board

A comprehensive report on the Oregon University System's entire investment portfolio, consisting of endowment funds (both pooled and separately invested), donation funds, and plant funds, is incorporated in the System's Investment Report, which is included with the supplemental materials (on file in the Board's office).

The annual report on the System's pooled endowment funds is presented in two parts: (1) a brief narrative that delineates the annual performance results of our investments, and (2) a table comparing investment performances for fiscal year ending June 30, 1999, to prior periods and to related benchmarks.

The June 30, 1999, market value and asset allocation of the System's pooled endowment fund investments are summarized as follows:

Pooled Endowment Fund Investments

Fund Title

Market Value 06/30/99

% of
Total

Barclays Global Investors Alpha Tilts Fund B $28,797,319 46.3%
Barclays Global Investors Russell 2000 Index Fund B 8,600,929 13.8%
T. Rowe Price Foreign Equity 6,276,962 10.1%
The Commonfund Multi-Strategy Bond Fund 12,790,469 20.5%
The Commonfund Real Estate Investment Trust 1,482,050 2.4%
The Commonfund Endowment Energy Partners 33,410 0.1%
The Commonfund Endowment Partners Fund 204,537 0.3%
The Commonfund Endowment Venture Partners 391,556 0.6%
TOTAL Investments $58,577,232 94.1%
Cash Invested in State Treasury's Short Term Investment Pool $ 3,682,080 5.9%
TOTAL Pooled Endowment Funds $62,259,312 100.0%

Summary

Equity:

Commonfund Multi-Strategy Equity Fund, sold on December 31, 1998 at a fair value of $38,264,388. The CF Multi-Strategy Equity Fund returned 1.9 percent for the period of July through December, 1998, compared with 9.3 percent for the S&P 500 Index. Large U.S. companies with strong earnings comprised the most secure asset class during this period, and drove the performance of the S&P 500. The Multi-Strategy Equity Fund is highly diversified over all asset classes. Its diversification into small cap and international investments caused the fund to severely lag the S&P 500.

Following approval by the Board and the Oregon Investment Council (OIC), the Commonfund Multi-Strategy Equity Fund was sold on December 31, 1998, and the proceeds were invested with new managers during January and February 1999. The proceeds were allocated as follows: 65 percent to Barclays Global Investors, Alpha Tilts Fund; 20 percent to Barclays Global Investors, Russell 2000 Index Fund; and 15 percent to the T. Rowe Price International Mutual Fund.

Barclays Global Investors (BGI) Alpha Tilts Fund B (6/30/99 market value $28.8 million, 46.3 percent of total). BGI's Alpha Tilts Fund B is a large-cap enhanced index fund that is designed to achieve above S&P 500 returns. Risks and costs are controlled by applying the infrastructure of index fund management to the goals of active management.

The Alpha Tilts portfolio returned 11.9 percent for the period of January through June 1999, while the S&P 500 Index returned 12.3 percent for the same period. The Alpha Tilts Fund utilizes tight risk controls that will primarily produce returns in line with the S&P 500. The Fund just slightly underperformed for the six-month period.

Barclays Global Investors Russell 2000 Index Fund B (6/30/99 market value $8.6 million, 13.8 percent of total). BGI's Russell 2000 Index Fund B is a small-cap index fund.

The Russell 2000 Index Fund B had a return of 8.6 percent for the six months ending June 30, 1999. This was below the Russell 2000 index return of 9.3 percent for the same period. An index fund should perform in line with the benchmark that it tries to replicate; however, investment management fees will drive the performance slightly lower. While fees account for a small portion of BGI's under performance, it is primarily due to the timing of our purchase in January and the manager's inability to exactly track the index. Manager's can have difficulties exactly replicating the performance of such a large index as the Russell 2000.

T. Rowe Price Foreign Equity (6/30/99 market value $6.3 million, 10.1 percent of total). The Foreign Equity Fund is an international mutual fund that is comprised of stocks from Europe, Pacific Basin (Australia, China, Hong Kong, India, Japan, New Zealand, Singapore, South Korea, and Taiwan), and the Americas (Argentina, Brazil, Canada, Chile, Mexico, and the United States).

The Foreign Equity Fund returned 5.5 percent and outperformed the MSCI EAFE Index return of 4.1 percent for the six-month period ending June 30, 1999. T. Rowe Price outperformed the EAFE Index during the six-month period due primarily to stock selection. They also have added value through a 5.0 percent allocation to Latin American countries. The economies of these underdeveloped countries rebounded dramatically in the first half of 1999.

Fixed Income:

Commonfund Multi-Strategy Bond Fund (6/30/99 market value $12.8 million, 20.5 percent of total). The Multi-Strategy Bond Fund is a "Fund of Funds," which means that it is a fund made up of allocations to other fixed income funds of the Commonfund. These funds include the High Quality Bond Fund, The Global Bond Fund and the International Bond Fund.

For the fiscal year, the fund gained 2.2 percent, while the Lehman Aggregate Index advanced 3.1 percent. The Multi-Strategy Bond Fund invests 27 percent of the portfolio in corporate bonds compared to the Lehman Aggregate allocation of just 15 percent. Corporate bond performance has slightly trailed the performance of treasuries, agencies and mortgage backed securities in the last year. Thus, the over weight of corporate bonds has not added value to the fund. Furthermore, the fund has a slightly more aggressive duration than the Lehman Aggregate, which has hurt the fund in the rising interest rate environment.

Other Investments:

Commonfund Capital Real Estate Investment Trust (6/30/99 market value $1.5 million, 2.4 percent of total). Through March 31, 1999, Real Estate Investment Trust's total return since inception stood at 6.81 percent, slightly ahead of the 5.75 percent total return for the benchmark, National Council of Real Estate Investment Fiduciaries Index, over the same period.

The fund returned 12.63 percent for the fiscal year compared to the benchmark return of 14.38 percent. The total liquidation of the fund is scheduled for December 31, 2000.

Commonfund Capital Endowment Energy Partners (6/30/99 market value $33,410, 0.1 percent of total). Endowment Energy Partners I (EEP I) has produced a net internal rate of return of 9.0 percent since its inception in October 1989 through June 30, 1999. EEP I completed its five year investment phase on December 31, 1994, and is scheduled for liquidation by December 31, 1999.

Commonfund Endowment Partners Fund I (6/30/99 market value $204,537, 0.3 percent of total). Endowment Partners I (EDF I) has an internal rate of return of 13.4 percent since its inception in October 1998 through March 1999. This fund was scheduled for liquidation by December 31, 1998, but has been extended to December 31, 1999.

Commonfund Endowment Venture Partners I (6/30/99 market value $391,556, 0.6 percent of total). The net internal rate of return on capital received from Endowment Venture Partners I (EVP I) participants since inception in 1990 through March 31, 1999, stood at 26.0 percent. This fund is scheduled for liquidation by June 30, 2002.

The following table summarizes the investment performance results for the fiscal year ending June 30, 1999, for the OUS Pooled Endowment Fund.

OREGON UNIVERSITY SYSTEM
POOLED ENDOWMENT FUNDS
PERFORMANCE COMPARISON

(Based on Total Return)

Annual Performance

94-95 95-96 96-97 97-98 98-99
Total Endowment
OUS Total Endowment 15.8% 16.4% 18.9% 21.6% 10.0%
NACUBO, Pools $25m to $100m 15.8% 16.7% 20.1% 17.7% --
Equity:
CF Multi Strategy Equity Fund (1) 17.6% 23.5% 25.4% 25.0% 1.9%
Benchmark-S&P 500 Stock Index (1) 26.0% 26.1% 34.7% 30.2% 9.3%
BGI Alpha Tilts Fund B (2) -- -- -- -- 11.9%
Benchmark-S&P 500 Stock Index (2) 26.0% 26.1% 34.7% 30.2% 12.3%
BGI Russell 2000 Index Fund B (2) -- -- -- -- 8.6%
Benchmark-Russell 2000 Index (2) -- -- -- -- 9.3%
T. Rowe Price Foreign Equity (2) -- -- -- -- 5.5%
Benchmark-MSCI EAFE Index (2) -- -- -- -- 4.1%
Fixed (Bond) Investments
OUS Multi-Strategy Bond Fund 13.7% 6.3% 10.0% 11.3% 2.2%
Lehman Aggregate Bond Index 12.5% 5.0% 8.2% 10.5% 3.1%
Other Investments
Real Estate Investment Trust 8.5% 8.8% 8.5% 13.1% 10.7%
Endowment Energy Partners 33.0% 1.5% 0.5% -39.5% -40.9%
Endowment Partners Fund 9.2% 4.9% 11.3% 19.4% 14.9%
Endowment Venture Partners 40.4% 53.2% 12.6% 23.9% 75.1%

(1) CF Multi-Strategy Equity Fund was sold on December 31, 1998. Returns for the fund and its benchmark are for six months only, July-December 1998.

(2) BGI Alpha Tilts Fund B, BGI Russell 2000 Index Fund B, and T. Rowe Price Foreign Equity were purchased in January 1999. Returns for the funds and their benchmarks are for six months only, January-June 1999.

(No Board action required)

SEMI-ANNUAL AUDIT REPORT

Staff Report to the Board

The Internal Audit Division's (IAD) Semi-Annual Audit Report January-June 1999, included in the supplemental materials (on file in the Board's office), summarizes audit results from projects completed over the past six months and provides an update on the status of IAD's 1998-99 Audit Plan. As part of the risk assessment program identified in the 1998-99 Audit Plan, departmental audits were completed at three OUS institutions. These audits focused on the business and administrative functions normally performed by campus departments. IAD also completed audits of the human resource function at five institutions, concentrating on operations impacted by Senate Bill 271. IAD dedicated significant consulting resources to provide support and information to the Board in three critical areas: (1) the remodel of the OUS budget system for allocating education and general funds to the institutions, (2) the policy related materials that govern OUS's fiscal operations, and (3) the conversion status of OUS's new Human Resources Information System.

(No Board action required)

1999-00 INTERNAL AUDIT PLAN

Staff Report to the Board

The Internal Audit Division (IAD) presents its audit plan for the 1999-00 fiscal year, which is included in the supplemental materials (on file in the Board's office). This plan incorporates selected best audit practices endorsed by the Institute of Internal Auditors, the American Institute of Certified Public Accountants, and other professional audit organizations. These practices have been integrated by IAD into three core programs designed to help address OUS's audit-related needs for the upcoming year: (1) the 1999-00 Risk Assessment Audit Program, which includes departmental audits, as well as reviews related to human resources, the OUS Resource Allocation Model, OUS performance indicators, Hyperian software, and Banner HRIS payroll; (2) the Consulting Services Program, which includes provisions for consulting on both campus and Systemwide issues; and (3) the Control Assessment and Training Program, which makes available combined risk assessment and internal control training sessions to campus departments. In addition to these programs, the plan provides for such other projects and services as campus request audits, audit follow-ups, outsourcing, fraud audits, and liaison for Federal, Oregon Audits Division, and other external audits and reviews.

(No Board action required)

EPSCoT GRANT AWARD

Summary

The Oregon University System recently received a grant from the U.S. Department of Commerce Experimental Program (EPSCoT). EPSCoT is a matching grants program that supports technology development, deployment and diffusion in eligible states by promoting partnerships between state and local governments, universities, community colleges, non-profit organizations and the private sector.

OUS serves as the lead applicant for this grant that seeks to re-orient Oregon's economic development strategy and reduce barriers between higher education and emerging technology businesses. It is focused on three areas: research and development, knowledge transfer, and industry cluster identification and assistance. Under the direction of the Governor, the state has moved away from a strategy of industrial recruitment and is instead focusing its efforts on growing Oregon-based companies. The proposed activities flow naturally out of a planning and coalition-building process and thus enjoy the strong support of the Governor, business community and higher education system. Partner organizations include the Oregon Economic Development Commission, the Board of Higher Education, the Board representatives from Oregon Independent Colleges Association, and community colleges.

The grant-related activities will improve the climate for entrepreneurs and provide a model for other states seeking to re-orient their economic development strategies. The $250,000 grant will be matched by $350,000 in state funds ($175,000 in-kind) for a total grant of $600,000. The grant supports the activities of the Economic Development Joint Boards Working Group.

Economic Development Joint Boards Working Group

The Economic Development Joint Boards Working Group (EDJBWG) was appointed by Governor Kitzhaber on May 6, 1999. The EDJBWG is the governing body for the EPSCoT grant. The major areas of focus for both the working group and the grant include research and development, knowledge transfer and industry cluster identification and assistance.

Membership on EDJBWG includes representatives from the following organizations:

Oregon University System/Board of Higher Education
Oregon Independent Colleges Association
Oregon Emerging Business Initiative
Oregon Economic and Community Development Department
Oregon Entrepreneurs Forum
Software Association of Oregon
Oregon Bioscience Association
Oregon Bar Association
Oregon Society of Certified Public Accountants
International Sustainable Development Foundation

A 1999-00 Work Plan and timeline are included in the supplemental materials (on file in the Board's office).

(No Board action required)