Purpose of this Policy

The purpose of this policy is to provide guidance to the Executive Committee and Finance Committee of The American Orthopaedic Association (AOA) in the discharge of their responsibilities for the monitoring of the AOA investment portfolio. This policy is intended to be dynamic, as the economic environment, investment objectives, and financial needs of The American Orthopaedic Association change over time.

Investment Objectives and Guidelines

The primary, long-term objective is to preserve the real (adjusted for inflation) purchasing power of the assets and income. Specifically, AOA is seeking to ensure that the present value of the existing funds grows at a rate that will exceed inflation while generating a predictable stream of spending income as determined by the Executive Committee.

The investment objectives of the AOA, are

  1. Sufficient income commensurate with the safety of principal and the spending requirements of the AOA
  2. Preserve purchasing power
  3. Capital growth in real (inflation-adjusted) terms

Financial Objectives

The overall objective for the aggregate portfolio is to achieve a total annual return equal to or greater than the spending rate of 5%, plus the rate of inflation over the long-term. The total rate of return takes into consideration interest and dividend income, plus realized and unrealized gains.  It is recognized that the real return objective may be difficult to attain in every five year period.  This performance is judged on rolling 3- and 5-year terms.

For the purpose of this requirement, the Finance Committee will use the U.S. Consumer Price Index as published by the Department of Labor as the definition of inflation.

Asset Categorization

The asset funds are classified as Program Funds, Operating Funds, Permanent Funds or Project/Discretionary Funds.

  1. Program Funds consist of donor or board designated restricted funds, or temporarily restricted funds.  The purposes of the funds are to generate an income as defined above to support specific programs and operations of The American Orthopaedic Association. (e.g. ABC, NATF, Steel, Hatcher, ICOE and restricted General Purpose funds). Investment income generated from the Program Funds in excess of spending on their respective programs will remain allocated to Program Funds.
  2. The Operating Funds are funds designated by the board to support the administrative functioning of the Association.  Revenue derived from these funds may be budgeted to support the operations of the Association. This fund is responsible for funding any operating loss when the physical year is completed or alternatively is credited with any operating income at year-end. (e.g. General Fund)
  3. The Permanent Fund’s purpose is to provide a finance reserve to assure continued operations of the essential functions of The American Orthopaedic Association.  They are long-term investments and investment income derived from these funds will not be used as operating revenue in the AOA budget. The funds balance should be equal to 50% of the AOA’s annual budgeted operating expenses, subjective to a minimum of $1.5 million.
  4. Returns from the Permanent Fund that exceed the policy parameters of the Fund (50% of operating expenses or a minimum $1.5 Million) may be swept into the Project/Discretionary Fund.  The Project/Discretionary Funds will be designated to provide financial resources to initially fund new programs and product development approved by the Executive Committee.  Investment income generated from these funds will remain allocated to Project/Discretionary funds.
  5. Pathways Individual Contribution Funds are funds designed to have protected principle, if possible, but which are not considered endowment funds. These funds are segregated into AOA program accounts, designated by the donor, and invested in a fund chosen and overseen by the Investment and Finance Committees. The Executive Committee has flexibility to utilize all directed funds (interest and principle) as needed to support the designated activity.


Spending Guidelines

The AOA Executive Committee has established the following spending policies

AOA programs that budget revenue derived from Program Fund and Operating Fund endowments (fellowships, administration, etc.) shall spend at a rate not to exceed 5% annually of the balance of the respective Program Fund or Operating Fund.

Use of Project/Discretionary Funds are limited to no more than 25% Project/Discretionary fund balance being utilized in any single calendar year. The utilization of these funds must be approved by the Executive Committee.

Investment Allocation Objectives and Guidelines

Consistent with its investment objectives, the investment funds shall be divided into two parts: a Fixed Income portion and an Equity portion.The purpose of dividing the funds in this manner is to endure that the overall asset allocation between these two major asset classes is determined by the Finance Committee rather than by the investment manager(s). The asset allocation will be monitored to attempt to reduce downside volatility while maximizing return at an acceptable level of risk.

Investment managers are free to make their individual selections without restrictions, except for the established guidelines herein.

Fixed Income

Objectives: The investment objective of the Fixed Income portion is to provide a hedge against inflation, to provide a consistent rate of current income and to provide diversification of the investment portfolio.

Cash and equivalents constitute part of the overall allocation of Fixed Income.

The investment objective of cash equivalents is to provide adequate liquidity for investment reserves and current operations and, from time to time, to serve as substitutes for other asset classes for defensive purposes in adverse investment conditions.


The Fixed Income portion of the portfolio should range between (25-40%) of total assets, with a current target of (40%) of total assets. If the Fixed Income portion rises above 40% of total assets, the Finance Committee will likely withdraw funds from this portion of the total portfolio.  If the Fixed Income portion falls below 25% funds will typically be added.  Only the Executive Committee, with input from the Finance Committee, can revise the investment parameters set in this policy.

Net returns are expected to exceed the CPI by at least 2% annually over rolling 3 and 5-year periods. A secondary objective of the Fixed Income Portion is to perform in-line with the Lehman Bros. Intermediate Gov. / Corp. Bond Index.

Investments in fixed income securities should be managed actively (indexed?) to pursue opportunities presented by changes in interest rates, credit ratings and incremental yields for different asset classes.  Managers may select from corporate debt securities, taxable municipal issues, and obligations of the U.S. Government and its agencies.  These investments are subject to the following limitations:

There are no restrictions on the amount of US Treasury and agency bonds, notes and bills.  Bonds must be rated at a minimum of “A” (AA?) by Moody’s or Standard and Poor’s.

Corporate bond holdings will be diversified so that a maximum of $100,000 (principal amount) is held in any one issuer, or issuer’s affiliates. Maximum maturity of bonds will be 12 years, or in case of mortgage backed bonds, the maximum average life is 12 years.

Managers are prohibited from investing in interest rate futures, or related derivative securities.

Managers may invest in commercial paper, repurchase agreements, Treasury Bills, and money market funds to provide income, liquidity, and preservation of principal value. All such assets must represent maturities of one year or less at time of purchase. Commercial paper assets must be rated A 1 or P 1 by Standard & Poors and Moody’s, respectively.  Within the limitations mentioned above, the manager(s) have complete discretion to allocate and select short term cash and equivalent securities.

Equity Portion

Objectives: The objective of the equity portion is to produce a proportionally greater contribution to the total return than the fixed income portion. It is recognized that the equity portion entails the assumption of greater market variability (i.e. risk).

The primary objective of the equity portion is to achieve a net (of fees) annual return that equals or exceeds the CPI plus 6-7% over a moving 3-5 year period. A secondary objective of the equity portion is to perform in line with or better than (net of fees) the blended weighted benchmark.


The Equity portion of the portfolio should range between 60-75% of total assets, with a current target of 60% of total assets. If the Equity portion rises above 75% of total assets, the Finance Committee will likely withdraw funds from this portion of the total portfolio. If the equity portion falls below 60%, funds typically are added. Only the Executive Committee, with input from the Finance Committee, can revise the investment parameters set in this policy.

Stocks should be listed on the NYSE, ASE and/or NASDAQ.  Foreign holdings must be in ADR’s, not in ordinary shares which trade in a foreign currency.

Managers are prohibited from investing in private placements, letter stock, options or other forms of derivation securities, or from engaging in short sales or margin transactions.

No purchase of common stock should result in a holding of that issue at the time of purchase in excess of 4% of the market value of the portion of the equity portfolio. Equity diversification among a variety of industry groups is desirable, but since industry classification is difficult, no specific diversification is mandated.

Use of convertible bonds and convertible preferred stocks are permissible. Such issues would be purchased as equity substitutes and should be considered as part of the equity portion of the portfolio, credit quality restrictions will not apply.

Equity funds may be invested in large capitalization issues (over $10 billion), mid-capitalization issues ($2-$10 billion) and small capitalization issues (under $2 billion), however large capitalization issues should constitute the majority of the market value of the equity portfolio.

The AOA shall not directly invest in the equity of debt securities of companies whose primary activities are related to the orthopedic manufacturing industry.

Other Assets

Investments not specifically addressed by this statement are forbidden without written consent.

Risk Tolerance

The following statements reflect the Executive Committee’s understanding of capital market risk as well as measures adopted to limit portfolio volatility.

  1. The Executive Committee recognizes that the primary fiduciary obligation regarding investment funds is to optimize the inflation-adjusted principal value of the investments to meet current and future financial requirements of the corporation.
  2. The Executive Committee recognizes the likelihood of periodic market declines and is willing to accept the possibility of some short-term decline in market value in order to achieve potentially higher long-term returns.
  3. Investment assets are to be diversified to protect against large investment losses and to reduce the risk of excessive performance volatility.  Diversification is to be achieved by allocating monies to various asset classes and by retaining investment management firm(s) and /or funds with complementary investment philosophies, styles, and approaches.
  4. Asset allocation will be structured to minimize downside volatility while maximizing return at an acceptable risk level.
  5. A reasonable time frame for evaluating investment performance shall approximate a market cycle (about 3 to 5 years).

Monitoring Objectives and Results

  1. All objectives and policies are in effect until modified by the AOA Executive Committee.
  2. If at any time a manager believes that any policy guideline inhibits investment performance, it is the manager’s responsibility to clearly communicate this view to the AOA Treasurer and Finance Committee.
  3. Managers are required to inform the AOA Treasurer or his/her designee of any significant changes in firm ownership, organizational structure, professional personnel, account structure, or investment philosophy.
  4. Portfolios will be monitored on a continual basis for consistency in investment philosophy, return relative to objectives, and investment risk taken and avoided.  Portfolios will be reviewed by the Finance Committee on a continuing basis, at least annually, but the results will be evaluated over running 3 to 5 year periods.
  5. The manager(s) will issue quarterly reports and will be available for regular meetings with the Finance Committee and/or Executive Committee as desired (at least annually) to review the status of the account and the manager’s performance, compared to the objectives.


Investment managers are provided with a written copy of this statement and it is made a part of the investment management contract with such manager.

Delegation of Responsibilities

The American Orthopaedic Association recognizes its responsibility to manage the investment assets of the AOA 

  1. for the exclusive benefit of the AOA; 
  2. prudently and in full compliance with all policies, applicable laws and regulations, 
  3. to enhance long-term returns within the risk parameters established by the AOA. The Finance Committee, Treasurer or other AOA representatives/personnel shall not influence the specific holdings (equities, bonds, or other classifications) in the portfolio.

The AOA acknowledges the ultimate responsibility for satisfactory investment results rests with the Executive Committee. The Executive Committee has delegated certain responsibilities to both the Finance Committee and Staff. In addition, the Finance Committee has delegated certain day-to-day operating responsibilities to the staff.

Created November 2002

Revised: June 2004

Revised: March 22, 2006

Revised: March 21, 2013