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Attachment C

[[underlined]] Smithsonian Endowment Funds
Total Return Income Payout Policy - FY 1981 [[/underlined]]

In January, 1979, the Board of Regents amended the Total Return Income Payout policy for endowment funds to provide that:

"Prior to the beginning of each fiscal year, the Secretary and the Investment Policy Committee will propose to the Board of Regents, as part of the budget process, a set amount per unit which will be the total return income payout to participating endowment fund units in the succeeding year; this amount will take into account such factors as, but not limited to (1) 4-1/2% of the five-year adjusted running market averages, (2) current dividend and interest yield, (3) support needs for bureaus and scientists, and (4) inflationary factors as measured by the Consumer's Price Index."

Background on each of these items follows, together with possible alternative payout amounts for fiscal year 1981, beginning next October.

(1) [[underlined]] 4-1/2% Formula [[/underlined]]:

Prior to January, 1979, income payout to endowment funds automatically set at 4-1/2% of the five-year market average; under the new policy, this is merely one factor to be considered.  Application of the 4-1/2% formula in FY 1981 would indicate a payout rate of $4,80/unit*, or 4.4% of the current market value.  Payout in FY 1980 has been $5.00/unit (4.86% of the then five-year average) and in FY 1979 was $4.74/unit (4.67% of the then five-year average).

(2) [[underlined]] Current Dividend and Interest Yield [[/underlined]]:

The current annual dividend and interest yield from the endowment funds is 6.7% of present market value (or 7.2% of the five-year running average market value).  In FY 1979, at the payout of $4.74/unit, yield exceeded payout by almost $1,000,000 (after payment of managers fees), and this amount was reinvested into principal.  In FY 1980, the excess yield to be reinvested into principal will be almost $1,200,000, even at the increased payout of $5.00/unit.  By the end of this year, reinvestment of excess yield will have more than restored withdrawals from principal in the years 1973 through 1978.  Yield in FY 1981 may be expected to increase since 87% of the assets are equities, and a modest increase in dividend rates will probably occur.

*The endowment funds are accounted for on a "mutual fund basis", with each named endowment -e.g. Freer Fund - owning a certain number of shares or units of the total funds; as of March 31, 1980, there were 547,600 units outstanding, having a market value of $109.58 each.