Governance

American Association of Physicists in Medicine Segregated Assets

Statement of Investment Policies and Objectives

August 1998

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Introduction

The purpose of this Statement of Investment Policies and Objectives is to set forth the American Association of Physicists in Medicine's (AAPM) plan for effectively supervising and monitoring the investment of its Segregated Assets. In the various sections of this policy document AAPM defines its investment program by: identifying an appropriate risk posture for the Segregated Assets; stating AAPM's expectations and objectives for the various portfolios; providing portfolio guidelines that are consistent with the risk posture and objectives of AAPM; establishing criteria to monitor and evaluate the performance results of the Segregated Assets' investment managers; and, encourage effective communication between the managers and AAPM.

The policies and objectives in this policy document were designed to achieve the objectives for the Segregated Assets established by the AAPM Board of Directors. Segregated Assets will be divided into three portfolios: Operating Fund, Reserve Fund, and Education Endowment Fund. The objectives for the Segregated Assets include:

1. The aggregate of the Operating Fund and Reserve Fund portfolios should grow to the level of one's years operating funds over the next six to nine years.

2. The Operating Fund portfolio is structured so that it offers a reasonable probability of meeting a real rate of return objective of at least 0.5% per year over a period of one to three.

3. The Reserve Fund portfolio is structured so that it offers a reasonable probability of meeting a real rate of return objective of at least 5% 4% per year over a period of five to seven years.

4. The Education Endowment Fund portfolio is structured so that it offers a reasonable probability of meeting a real rate of return objective of at least 5% per year over a period of seven to ten years.

The policy guidelines defined herein offer a reasonable probability of enabling AAPM to meet the objectives for the Segregated Assets. While providing for the preservation of existing Segregated Assets, the guidelines allow AAPM to protect and grow the inflation-adjusted value of the assets and to generate income for ongoing operating and program spending requirements.

The investment policy guidelines set forth below will be reviewed from time-to-time to ensure that they continue to reflect the best interest of AAPM and its members. Changes in policy guidelines are subject to AAPM Board of Directors approval.

Investment Responsibilities

The Board of Directors of AAPM is responsible for establishing investment policies and cash transfer policies.

The Finance Committee shall recommend annually the amount of money to be budgeted to the Operating Fund and the Reserve Fund.

The Development Committee shall award scholarships and grants to individuals or institutions in furtherance of the AAPM's tax-exempt purposes. Dividends and capital gains realized from the Education Endowment Fund shall be used for such disbursements as per the Cash Transfer Policy of the Education Endowment Fund.

The Board of Directors authorizes the Executive Committee to open and/or close accounts in the name of the society as deemed necessary by the Executive Committee to enable assets to be effectively managed.

The Board of Directors of AAPM delegates to the Investment Advisory Committee the responsibility for ensuring the Segregated Assets are invested effectively and prudently.

While the AAPM's Board of Directors outlines the objectives for the Segregated Assets and ratifies changes to the Statement of Investment Policies and Objectives, the Investment Advisory Committee's primary responsibilities include:

. Recommending and reviewing policies and objectives;

. Developing investment strategies and guidelines to meet the investment objectives of the three portfolios;

. Selecting or removing investment managers, custodians, and other consultants;

. Establishing fund categories within asset classes;

. Establish minimum and maximum allocation ranges for each fund category;

. Reallocating the assets among managers if the overall allocation policy limits have been exceeded, within the investment policies states herein;

. Identify the benchmark against which portfolio performance will be evaluated;

. Reporting investment results stated in terms of the real rate of return to the Board of Directors at least once each calendar year. (This annual report should be submitted to the AAPM Newsletter for publication);

. Vote proxies or delegating this task to an external manager.

Every five years, the Investment Advisory Committee shall perform a systematic and comprehensive review of the organization's objectives, portfolio management experience, and investment policies. A written report of their review shall be submitted to the Board of Directors.

Risk Posture

Segregated Assets are divided into three portfolios: Operating Fund, Reserve Fund, and Education Endowment Fund. The Reserve Fund portfolio is available to supplement the organization's operating income, if necessary. Fluctuations in this portfolio can affect AAPM's financial statements. Substantial realized or unrealized losses that are deemed to be 'permanent in nature' may be charged to current operations.

While policies and objectives for the Segregated Assets were developed to meet the objectives outlined by the Board of Directors, AAPM also assesses various risk tolerance factors and how they relate to the designated portfolio investment policy.

. Liquidity Risk: The risk that the AAPM will need to liquidate Reserve Fund assets in order to meet current operating expenses.

. Inflation Risk: The risk that inflation erodes the real value of the Segregated Assets while increasing AAPM's operating expenses. This risk is considered low and AAPM expects to be able to pass along cost increases associated with inflation.

. Financial Risk: The financial ability of the AAPM to tolerate substantial fluctuations in the market value or income-generating ability of the Segregated Assets. AAPM's financial risk tolerance is considered moderately low.

. Risk Preference: The willingness of AAPM to commit to long-term high return, high volatility vehicles versus a preference for relatively risk free, low volatility, stable return investments. AAPM's willingness to tolerate investment risk is moderate. The appropriate risk posture is defined as: a willingness to tolerate a moderate level of annual return volatility in order to protect the purchasing power of the Segregated Assets and to provide for modest growth; and, a willingness to sacrifice some opportunity for maximum returns in order to avoid onerous short-term volatility.

Asset Allocation Guidelines

AAPM has developed asset allocation guidelines consistent with the risk posture defined above and with the investment objectives set forth below. These guidelines also reflect a desire to allow a substantial degree of flexibility for tactical decisions by the investment managers. Policy guidelines for asset class are set forth in a subsection of the investment policy statements for each of the portfolios.

The three portfolios are diversified by asset class and fund category in an effort to further control risk. Individual managers will be retained so that the overall 'blend' of investment styles represented in each portfolio produces a sufficient level of diversification.

The Investment Advisory Committee may adjust the actual equity and fixed-income allocation for each of the portfolios within the policy ranges set forth above. Rebalancing of the assets shall occur at least quarterly to maintain the targeted allocation mix.

Operating Fund: Investment Policy

1. Investment Objectives

The Operating Fund (Fund) is established to manage the money budgeted for the annual operating costs associated with AAPM including direct cost of member services, organization costs, and administrative costs. The investment objective of this Fund is to provide the maximum current income consistent with the maintenance of principal and liquidity by investing in specified money market instruments and high quality short-term fixed income securities. A portfolio shall be constructed with a targeted real rate of return of 0.5%.

2. Policy and Guidelines

A. General Guidelines:

The Fund seeks to achieve its objectives by investing in a diversified portfolio of certificate of deposits.

B. Quality Statement:

Commercial paper must be rated a minimum of Prime-1 by Moody's or A-1 by Standard & Poor's.

3. Disbursement Policy

The Executive Director is responsible for making disbursements from this Fund to pay organizational costs, administrative costs, and the cost of member services associated with the operation of AAPM.

Reserve Fund: Investment Policy

1. Investment Objectives

The Reserve Fund (Fund) is established to manage assets held in reserve to assure that the commitments of AAPM will be honored. Sufficient assets shall be allocated to the Fund to:

. Honor all publishing commitments for one year;

. Cover all expenses AAPM is committed to for its Annual Meeting and the RSNA meeting in a year when circumstances other than a natural disaster cause cancellation of the Annual Meeting;

. Cover obligated expenses of the Summer School and other Symposia in the event that they are canceled for reasons other than a natural disaster;

. Replace existing equipment owned by AAPM should it become necessary;

. Cover commitments for new programs approved the previous year.

The investment objective of this Fund is to provide a reasonable income return as well as long-term capital growth without undertaking undo risk. A portfolio shall be constructed to preserve the real value of both principal and income with a targeted real rate of return of 4%.

2. Policy and Guidelines

A. Asset Allocation:

The Fund seeks to achieve its objectives by investing in a diversified portfolio of common stocks, preferred stocks, and bonds, it is expected that common stocks and preferred stocks will represent 50% to 60% of the Fund's total assets. The remaining 40% to 50% of the Funds assets will be invested in fixed-income securities and cash equivalents.

B. Manager Objectives:

AAPM expects its managers, over a five-year period, to achieve the following results:

. Active equity managers should produce a return that ranks in the upper 33% of all similar style equity managers; and is within 90% of the relevant index.

. Active fixed-income managers should achieve results that rank in the upper 33% of all similar style fixed-income managers; and is within 95% of the relevant index.

. Passive managers are expected to generate returns within 0.3% of the relevant index.

C. Investment Limitations:

The Fund has adopted certain limitations in an attempt to reduce its exposure to specific situations. No more than twenty-five percent (25%) of the Segregated Assets may be invested in foreign securities.

Equity Segment

Equity managers are expected to adhere to the following policy guidelines:

. Equity holdings in any one company (including common stock and convertible securities) should not exceed eight percent (8%) of the market value of the manager's portion of the portfolio.

. Equity holdings in any one industry (as defined by Standards & Poor's) should not exceed twenty percent (20%) of the market value of the manager's portion of the portfolio without the consent of the AAPM.

. No more than twenty percent (20%) of the market value of the portfolio may be invested in foreign securities, including, but not limited to, ADR's, U.S. pay Canadian issues, international equity funds, and direct investments in companies listed on a foreign exchange.

. Equity managers are generally expected to invest non-equity assets in cash equivalent securities. Non-equity positions should not exceed ten percent (10%) of the equity manager's portfolio, at market value.

. Investments in cash equivalents generally are expected to consist of high quality short-term money market instruments. Appropriate investments include obligations issued by or guaranteed by the U.S. government, its agencies, or its instrumentalities, commercial paper, certificates of deposit and bankers acceptance, repurchase agreements, and fixed time deposits of foreign banks or foreign branches of U.S. banks.

. An equity manager may invest in fixed-income securities (i.e., securities with more than one year to maturity) if projected returns on such securities are perceived to be competitive with potential equity returns. All fixed-income commitments are subject to the quality guidelines outlined in the fixed-income segment below.

. It is expected that investments in 'emerging' markets and small capitalization stocks will represent less than twenty-five (25%) of the portfolio's market value.

. It is also expected that international equity managers may use various currency hedging tools in the forward and foreign exchange markets. Foreign currency options also may be permissible investment tools.

Fixed-Income Segment

Fixed-income managers are expected to adhere to the following policy guidelines:

. Bonds held in the fixed-income segment should have a Moody's, Standard & Poor's, or Fitch's quality rating of "Baa" or better. Unrated securities of the U.S. Government, its agencies, or instrumentalities are qualified for inclusion in the portfolio.

. The diversification of securities by maturity, quality, issuer, sector, coupon, et cetera, is the responsibility of the manager.

. The exposure of the manager's portfolio to any single issuer's securities other than securities issued by or guaranteed by the U. S. Government, its agencies, or instrumentalities should be limited to five percent (5%) of the manager's portion of the portfolio measured at market value.

. No more than fifty percent (50%) of the portfolio, at market value, should be invested in the corporate bond market. No more than fifteen percent (15%) of the portfolio, at market value, may be invested in securities of foreign issuers.

. The cash equivalents position should not exceed fifty percent (50%) of the portfolio assets, at market value. The minimum quality standards for cash equivalent securities set forth above for the equity segment also apply to the short-term holdings of the fixed-income segment.

. The portfolio duration should not deviate by more than fifty percent (50%) from the Lehman Brothers Aggregate bond index duration.

D. Diversification Standard:

No more than thirty percent (30%) of the Fund's assets will be assigned to any single investment manager. (The investment manager is defined to be the individual(s) who manage(s) the portfolio's assets and are responsible for the day-to-day investment decisions.) Additional share purchases of any equity investment manager shall cease after valuation exceeds twenty-five percent (25%) of Fund assets.

3. Disbursement Policy

The Board of Directors will approve, at their discretion, expenditure of assets from the Fund.

Education Endowment Fund: Investment Policy

1. Investment Objectives

The Education Endowment Fund (Fund) is established to manage donations and bequests. The investment objective of this Fund is to provide a reasonable income return as well as long-term capital growth without undertaking undo risk. A portfolio shall be constructed to preserve the real value of both principal and income with a targeted real rate of return of 5%.

2. Policy and Guidelines

A. Asset Allocation:

The Fund seeks to achieve its objectives by investing in a diversified portfolio of common stocks, preferred stocks, and bonds, it is expected that common stocks and preferred stocks will represent 50% to 70% of the Fund's total assets. The remaining 30% to 50% of the Funds assets will be invested in fixed-income securities and cash equivalents.

B. Manager Objectives:

AAPM expects its managers, over a five-year period, to achieve the following results:

. Active equity managers should produce a return that ranks in the upper 33% of all similar style equity managers; and is within 90% of the relevant index.

. Active fixed-income managers should achieve results that rank in the upper 33% of all similar style fixed-income managers; and is within 95% of the relevant index.

. Passive managers are expected to generate returns within 0.3% of the relevant index.

C. Investment Limitations:

The Fund has adopted certain limitations in an attempt to reduce its exposure to specific situations. No more than twenty percent (20%) of the Segregated Assets portfolios may be invested in foreign securities.

Equity Segment

Equity managers are expected to adhere to the following policy guidelines:

. Equity holdings in any one company (including common stock and convertible securities) should not exceed eight percent (8%) of the market value of the manager's portion of the portfolio.

. Equity holdings in any one industry (as defined by Standards & Poor's) should not exceed twenty percent (20%) of the market value of the manager's portion of the portfolio without the consent of the AAPM.

. No more than twenty percent (20%) of the market value of the portfolio may be invested in foreign securities, including, but not limited to, ADR's, U.S. pay Canadian issues, international equity funds, and direct investments in companies listed on a foreign exchange.

. Equity managers are generally expected to invest non-equity assets in cash equivalent securities. Non-equity positions should not exceed ten percent (10%) of the equity manager's portfolio, at market value.

. Investments in cash equivalents generally are expected to consist of high quality short-term money market instruments. Appropriate investments include obligations issued by or guaranteed by the U.S. government, its agencies, or its instrumentalities, commercial paper, certificates of deposit and bankers acceptance, repurchase agreements, and fixed time deposits of foreign banks or foreign branches of U.S. banks.

. An equity manager may invest in fixed-income securities (i.e., securities with more than one year to maturity) if projected returns on such securities are perceived to be competitive with potential equity returns. All fixed-income commitments are subject to the quality guidelines outlined in the fixed-income segment below.

. It is expected that investments in 'emerging' markets and small capitalization stocks will represent less than twenty-five (25%) of the portfolio's market value.

. It is also expected that international equity managers may use various currency hedging tools in the forward and foreign exchange markets. Foreign currency options also may be permissible investment tools.

Fixed-Income Segment

Fixed-income managers are expected to adhere to the following policy guidelines:

. Bonds held in the fixed-income segment should have a Moody's, Standard & Poor's, or Fitch's quality rating of "Baa" or better. Unrated securities of the U.S. Government, its agencies, or instrumentalities are qualified for inclusion in the portfolio.

. The diversification of securities by maturity, quality, issuer, sector, coupon, et cetera, is the responsibility of the manager.

. The exposure of the manager's portfolio to any single issuer's securities other than securities issued by or guaranteed by the U. S. Government, its agencies, or instrumentalities should be limited to five percent (5%) of the manager's portion of the portfolio measured at market value.

. No more than fifty percent (50%) of the portfolio, at market value, should be invested in the corporate bond market. No more than 15% of the portfolio, at market value, may be invested in securities of foreign issuers.

. The cash equivalents position should not exceed fifty percent (50%) of the portfolio assets, at market value. The minimum quality standards for cash equivalent securities set forth above for the equity segment also apply to the short-term holdings of the fixed-income segment.

. The portfolio duration should not deviate by more than fifty percent (50%) from the Lehman Brothers Aggregate bond index duration.

D. Diversification Standard:

No more than thirty percent (30%) of the Fund's assets will be assigned to any single investment manager. (The investment manager is defined to be the individual(s) who manage(s) the portfolio's assets and are responsible for the day-to-day investment decisions.) Additional share purchases of any equity investment manager shall cease after valuation exceeds twenty-five percent (25%) of Fund assets.

3. Cash Transfer Policy

The maximum amount of cash transferred, on an annual basis, to the Operating Fund for the Development Committee's discretionary use shall be seventy-five percent (0.75) of the Education Endowment Fund's real rate of return for the preceding year.

Evaluation and Review Process

On a timely basis, but not less than twice a year, AAPM will review actual investment results achieved by each manager (with the appropriate time horizon) to determine whether:

. The investment managers performed in adherence to the investment philosophy and policy guidelines set forth herein,

. The investment managers performed satisfactory when compared with AAPM's objectives as a primary consideration; peer money managers; and market indices.

In addition to reviewing each investment manager's result, AAPM will reevaluate, from time to time, its progress in achieving the equity segment and fixed-income segment objectives presented above. The periodic reevaluation also will involve an evaluation of the continued appropriateness of:

. Each portfolio manager structure (i.e., number and management style);

. The allocation of assets among fund category;

. The investment objectives for each of the portfolios.

Responsibilities of the Investment Managers

The duties and responsibilities of the investment managers retained by the AAPM include:

. Managing the assets in accordance with the policy guidelines and objectives expressed herein, or as expressed in a separate written agreement when deviation is deemed prudent and desirable.

. Exercising investment discretion within the guidelines and objectives stated herein.

. Promptly informing AAPM regarding all significant matters pertaining to the investment of the portfolio it manages for AAPM, for example: substantive changes in investment strategy, portfolio structure, and market value of managed assets; and significant changes in the ownership, affiliations, organizational structure, financial condition, and professional staffing of the investment management organization.

. Initiating written communication with AAPM whenever the investment believes that this Statement of Investment Policies and Objectives should be altered.

. Submitting at least quarterly reports describing portfolio holdings, performance results, and transaction activities.

. Voting all proxies after careful assessment of the issues involved. The manager should pay particular attention to items that may reduce the economic value of stockholders' rights of ownership and thereby impact adversely the performance of the portfolio.

. Meeting with AAPM on a regular basis. AAPM expects to meet with each investment advisor at least annually.