Children s Organ Transplant Association, Inc. Investment Policy Statement

Children s Organ Transplant Association, Inc. Investment Policy Statement For Patient Accounts Smith Memorial Account Administrative Account Endowment Funds Updated August 13, 2011 Document Prepared by: David K. Hays of Comprehensive Financial Consultants Institutional, Inc. an SEC, Registered Investment Advisor 1

Table of Contents I. Executive Summary II. III. IV. Purpose Statement of Objectives Duties and Responsibilities a. Board of Directors b. Investment Committee c. Investment Advisor V. Investment Policy and Guidelines a. Portfolio Description b. Time Horizon c. Diversification d. Asset Allocation e. Rebalancing Procedures f. Risk (Market, Maturity, Liquidity) g. Performance Expectations VI. VII. VIII. Guidelines for Plan Holdings a. Domestic Equities b. Domestic Fixed Income c. International Equities & Fixed Income d. Real Estate Investment Trust e. Alternative Investments Control Procedures a. Review of Liabilities b. Review of Objectives c. Cash flow testing d. Review of Investment Advisor e. Review of Investment Performance f. Proxy Statements and Voting Adoption Statement 2

Executive Summary Fund Name(s): Patient Accounts (Restricted Funds) Smith Memorial Fund (Board Designated) Administrative Fund (Unrestricted Funds) Endowment Fund (Restricted Funds) Federal Tax ID #: 35-1674365 Total Fund Assets: $22,603,522 (as of August 13, 2011) Key Contact Names: Investment Advisor David Hays, President CFCI, Inc. 812-334-3190 Children s Organ Transplant Association, Inc. Richard Lofgren, CEO 812-336-8872 Bunger & Robertson (Legal Counsel) James Whitlatch, Partner 812-332-9295 Crowe Chizek & Company LLC (Auditor) Pete Ugo, Certified Public Account 317-569-8989 3

Purpose This document establishes the Investment Policy Statement (IPS) for the Children s Organ Transplant Association, Inc. (COTA), and is designed to assist in supervising, monitoring and evaluating the investment of COTA s assets. A thorough investment program is defined throughout this document to achieve the following: 1. Document COTA s investment objective, performance expectations, along with providing investment guidelines for the Investment Advisor and the Investment Committee. 2. Establish an appropriate investment strategy for managing all of COTA s accounts, including an investment time horizon, risk ranges and asset allocation. The goal of this strategy is to provide sufficient diversification and overall returns, necessary to fulfill COTA s mission. 3. Establish investment guidelines to control overall risk and liquidity, within the agreed upon investment strategy. 4. Establish periodic performance reporting requirements that will effectively monitor investment results and ensure that the IPS is being followed. 5. Comply with fiduciary, prudence, due diligence and legal requirements for the assets being managed. The Finance Committee has arrived at this IPS, through careful study of the returns and risk associated with alternative investment strategies in relation to the current and projected spending policy and fund raising requirements for COTA. This policy has been chosen as the most appropriate means for achieving the objectives of COTA, with are described in detail later in this document, under the Statement of Objectives section. Statement of Objectives The investment objective, of COTA s investment accounts, shall be defined as: 1. To preserve and enhance the purchasing and earning value of the funds being invested. 2. To seek competitive investment performance, versus appropriate or relative benchmarks. 3. To produce enough annual income to cover annual budget requirements. 4. To produce enough growth to hedge inflation over time. Spending Policy The spending policy for COTA s investment accounts, as set forth by the Finance Committee shall be as follows: All income (including interest, dividends and capital gain distributions from mutual funds) from Patient Accounts and the Smith Memorial Account, are to be swept as earned, to the 4

Administrative Account. Realized (and unrealized) gains, in the accounts will be swept over, as directed by the Chief Financial Officer, and later reported to the Finance Committee. Patient Accounts are deemed temporarily restricted funds. The principle portion of these accounts are used to pay for patient transplants, medications, expense re-imbursements, or anything else associated with a patient s medical care. Money raised by patient campaigns goes into this fund. Funds are distributed from this account when it is time to pay an expense for the patient. If a patient passes away with a balance in their account, those funds may be used for other patient needs or for the matching fund program. The Smith Memorial Fund (Board Designated) is considered to be unrestricted funds. These funds are there to provide the guarantee necessary to establish a patient on a transplant waiting list and to provide matching funds, for patient fund raising campaigns (that hit certain targets, set by COTA). After a guarantee is made for a patient, COTA then aids in setting up a fund raising campaign for that Patient; all funds raised go to the Patient Accounts. If the ability to receive a transplant becomes available before all the funds needed are raised by a campaign, or a campaign falls short of the amount needed to pay the expenses of a transplant, this fund may be used by the Board to cover those liabilities if sufficient funds are not first available in the deceased patient fund. If these funds are used in such cases, they may be replenished if the funds are raised after a transplant has occurred. Board Designated funds may also be used if COTA has a need to pay unplanned Administrative Expenses (those not in the budget), to fund a new program or anything else the Board of Directors deems necessary to support the Mission of COTA. Administrative Funds are considered to be unrestricted funds and are used to help fund the operating budget for COTA. This fund receives the income generated in both the Patient Account and the Smith Memorial Account. Any funds from Patient Accounts, that are not used within a patients lifetime, may be transferred to the Administrative Account, when deemed appropriate by the Chief Financial Officer and Chief Executive Officer of COTA. The fund is designed to help pay the administrative expenses, or operating expenses, of COTA. A monthly distribution of funds are to be direct deposited to the operating account of COTA, at their local bank. Endowment Funds are deemed restricted funds. The principle portion of these accounts are used to pay for specific donor-directed costs such as patient transplants, medications, expense reimbursements, or anything else associated with a pre-determined policy or guidelines. It shall be the responsibility of the Finance Committee to periodically review the spending policy to make adjustments as necessary to preserve the purchasing power of the overall investment accounts. Duties and Responsibilities The Finance Committee is responsible for managing the investment process in a prudent manner with regard to preserving principal while providing reasonable returns. In carrying out these duties, the Finance Committee has retained an independent Investment Advisor. The Investment Advisor s role is to provide guidance to the committee on matters pertaining to the investment of fund assets, including investment policy, investment selection, monitoring performance and compliance with the IPS. All decisions pertaining to the investment policy and guidelines for policy recommendations shall be made by the Finance Committee. 5

Individual duties and responsibilities are detailed below: Finance Committee 1. Retain a qualified Investment Advisor to assist in the development and implementation of the IPS (example, goals, objectives and guidelines). 2. Establish the investment policy for the funds. This includes, but not limited to, allocation between equity and fixed income assets, selection of acceptable asset classes and investment performance expectations. 3. Review of the Investment Advisor to assure that the policy is being followed and progress is being made toward achieving the funds objectives. Investment Advisor 1. Assist the Finance Committee in establishing investment policy and guidelines contained in the IPS. 2. Determine an investment strategy and coordinate the asset allocation process through either direct investments or funds that are held by a third party (like a brokerage account). 3. Monitor asset allocation among all asset classes and verify on a quarterly basis that allocations are within targets defined by this IPS and approved by the Finance Committee. 4. Monitor the investment performance of the funds and provide quarterly performance advisory reports to the Finance Committee. 5. Monitor monthly income needs for COTA against actual income being generated in the portfolio(s). 6. Report in a timely manner substantive developments that may affect the management of the funds assets. Investment Policy and Guidelines The Portfolio Fund assets will be held in an investment portfolio with an active, strategic asset allocation. This portfolio will be invested in exchange traded funds, mutual funds, individual stocks and bonds & nontraded, public real estate investments. It will also be up to the Finance Committee to determine if the use of derivatives is warranted - to help reduce exposure to certain asset classes or individual securities, but without limiting the potential in said investments. As a result of the asset mix, diversification occurs at many levels and the funds will remain highly liquid. The investment managers are responsible for managing the assets of each fund in accordance with the stated objectives and policies of that fund. 6

Time Horizon The individual fund objectives are based on a one, two and three year time horizon, so that interim fluctuations in market values should be viewed with the appropriate perspective. COTA has adopted this time horizon so that the chances and duration of investment losses are carefully weighed against the potential for appreciation of assets. Diversification Investments shall be diversified with the intent to minimize the risk of large losses to any of the funds. Consequently, the total portfolio will be constructed and maintained to provide prudent diversification with regard to the concentration of holdings in individual issues, corporations or industries. Diversification occurs as several levels. The portfolio is managed in accordance with the diversification and industry concentration restrictions set forth in the Investment Company Act of 1940, as amended (the 1940 Act ). The Finance Committee gives investment managers full responsibility for security selection and diversification, subject to a maximum 5% commitment of the portfolio s market value for an individual security, and 15% for any one industry sector based upon cost. Option Writing - Within the structure of the portfolio, there is expected to be equities which will be held or purchased based on value considerations and those purchased based upon growth in earnings considerations. The investment managers may not at its discretion, write calls or covered call options on all, or a portion of, the value of the equities in the portfolio, to produce greater income without prior consent from the Finance Committee. Asset Allocation Academic research indicates that the decision to allocate total account assets among various asset classes will far outweigh individual security selection and other decisions that impact portfolio performance. The Finance Committee believes that to achieve the greatest likelihood of meeting COTA s objectives, and to have the best balance between risk and return, the portfolio should allocate assets in accordance with targets for each asset class as stated below: Portfolio Allocations Fixed Income Target 50% Range 40%-75% US Equities Target 28% Range 10%-40% Real Estate Target 20% Range 0% - 25% International Equities Target 0% Range 0% - 10% Cash or Equivalents Target 2% Range 1% - 15% 7

Due to the fiduciary responsibility that comes with restricted funds, such as the Patient Accounts and the Endowment, a large allocation to Fixed Income is most prudent; while the Smith Memorial and Administrative Accounts will have a larger equity position. Re-Balancing Procedure From time to time, market conditions may cause the portfolio s investment in various asset classes to change. To remain consistent with the asset allocation guidelines established by this IPS, each asset class will be reviewed on a monthly basis and reported quarterly to the Finance Committee, to determine if the weighting are with in the appropriate ranges and if any re-balancing needs to occur. No automatic rebalancing will occur, in an effort to allow an asset class to move appropriately. The allocation of assets in the portfolio may deviate from the normal allocation within the permitted range when market conditions warrant. Such deviations are designed, primarily, to reduce overall investment risk in the long-term. Risk Tolerances The Finance Committee recognizes that the objective of the portfolio cannot be achieved without incurring a certain amount of principal volatility. The portfolio will be managed on both a tactical and fundamental basis, that seeks to minimize principal fluctuations over the established time horizon and that is consistent with the portfolio s stated objectives. Performance Expectations Over the long term, the investment objectives for this portfolio shall be to achieve enough income & gains to cover the operating budget for COTA. It is determined that a return of 5% + CPI, along with projected fund raising, is an appropriate expectation. Returns may vary significantly from target year to year. Guidelines for Portfolio Holdings The Investment Advisor should implement this IPS, through investments in Mutual Funds, Exchange Traded Funds, Unit Investment Trust, Individual Bonds, Individual Stocks, Individual Real-Estate Investment Trust, Limited Partnerships or Limited Liability Companies, Private Placements and derivatives. Domestic Equities The domestic equity portion of the portfolio will be comprised of individual stocks, exchange traded funds, mutual funds and unit investment trust. These securities may be listed on registered exchanges, or actively traded over-the-counter markets, or considered to be restricted securities (provided that the percentage of the fund s assets invested in such securities conform to the funds objectives). These securities may also include common stock, convertible notes and bonds, along with convertible preferred stock. 8

Non-U.S. Equities Any non-u.s. equities may be comprised of mutual funds or exchange traded funds only. No individual, non-u.s. security is allowed in the portfolio. Domestic Fixed Income The domestic fixed income asset class will be comprised of mutual funds and individual bonds. These securities may include U.S. Government and Agency securities, Corporate Notes and Bonds and Mortgage Backed bonds. High yield debt (rated as BBB- or below), may not account for more then 10% of the bond holdings at any one time and not more then 5% of the overall portfolio. Non-rated securities are allowed, if the investment manager determines the investment to be of comparable quality to investment grade. Non-U.S. Fixed Income Any non-u.s. fixed income will be comprised of mutual funds for exchange traded funds. No individual, non-u.s. security is allowed in the portfolio. Real Estate It is understood that COTA may hold real estate, either directly or indirectly, for investment purposes. These real estate investments may or may not have a public market and in most cases are deemed illiquid, for investment purposes. The real estate investments should be limited to office properties, hospitality, retail, multi-family & warehouse. COTA may own shares in a Real Estate Investment Trust, Limited Partnership or Limited Liability Company arrangement. It will be attempted to keep any non-liquid investments to the target allocation of 20% of the overall investment assets of COTA. Control Procedures The Finance Committee will review all policies, objectives and guidelines annually. This review will focus on an analysis of major differences between the different fund assumptions and actual experience. Review of Investment Objectives Investment performance will be reviewed annually by the Investment Advisor to determine the continued feasibility of achieving the investment objectives and appropriateness of the IPS for achieving these objectives. In addition, the validity of the stated objective will be reviewed annually. It is not expected that the IPS will change frequently. In particular, short-term changes in the financial markets should not require an adjustment in the investment policy of COTA. Review of Investment Performance Regular performance reviews will provide the following information: 1. Comparison of investment results to appropriate benchmarks, as well as market index returns in both equity and debt markets. Example benchmarks and indexes that may be used include: the 9

CPI as a measure of inflation; Wilshire 5000 Equity Index, S&P 500 Index as a measure for domestic equities; Barclays Aggregate Bond Index for a measurement against fixed income; the MSCI Europe, Australia, and Far East (EAFE) Index, to measure non-u.s. equity stocks. 2. Verification of adherence to the Investment Policy and Guidelines Review Liabilities to & from Patient Accounts As realized gains, or losses, occur within the Patient account, the Chief Financial Officer must inform the Investment Advisor if any sweeps to or from the Administrative account are warranted. Review of Investment Advisor The Investment Advisor will report on a quarterly basis the total fund performance. In addition, the Investment Advisor will be responsible for keeping the Finance Committee advised of any material changes to the investment asset allocation, strategy or other pertinent information potentially affecting performance of the accounts. The Finance Committee is to review the performance of the Investment Advisor on a year by year basis. If the Finance Committee finds the relationship valuable, then on an annual basis the Investment Advisor should be affirmed for another year. The Finance Committee is not required to bid the investment process annually, but will review the performance of the Investment Advisor, and re-affirm the Advisor at the close of each calendar year. Proxy Statements Proxy statements will be voted by the Chief Financial Officer with assistance from the Investment Advisor. Adoption of Investment Policy Statement The Children s Organ Transplant Association s Investment Committee has reviewed, approved and adopted this Investment Policy Statement, dated August 13, 2011. Signature of COTA Finance Committee Chair Date of Signature Signature of COTA Chief Executive Officer Date of Signature Signature of COTA Chief Financial Officer Date of Signature Signature of Comprehensive Financial Consultants Institutional, Inc. Date of Signature 10