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in foreign fixed income or debt instruments.  These investments have historically had a better return than similar domestic investments.

The Chairman inquired as to whether the Institution had ever been invested in foreign issues.  Miss Leven stated that the Smithsonian's investment in the Vanguard Trustees Commingled Fund - International Equity Portfolio in 1984 was the first such investment she was aware of during her tenure.

Mr. Bailey continued with his second reason for underperformance.  Starting in 1985 the Institution phased into a South Africa-free portfolio at the direction of the Regents.  The eliminated holdings generally had higher rates of return than the issues that replaced them.  This is validated when one compares rates of return for the standard indices and the United Nations South Africa-free portfolio managed by Fiduciary Trust.

Third, most college and university portfolios are more diversified than the Institution's.  Typically, about 10% of assets are invested in real estate and/or venture capital endeavors - investments that are riskier but have had a higher level of return, if successful.

As for individual manager performance over the same measurement periods, Mr. Bailey stated that Fiduciary Trust had matched the market averages; Batterymarch has underperformed as an equity manager until recently; Miller, Anderson has not been a Smithsonian manager long enough for measurements to be meaningful; and Nova Advisors significantly underperformed the averages except in 1987 when their investments performed dramatically better than the stock market.

Turning to the subject of fixed income holdings and asset allocation, Mr. Bailey listed four factors that need to be addressed in establishing an asset mix that includes significant fixed income holdings - a clearly stated investment objective, a time horizon for maturities, establishment of a dominant asset class, and consideration of potential hedges against inflation.  Mr. Bailey feels that intermediate to long-term bonds probably offer the best hedge against hyperdeflation or depression.  He noted that the Smithsonian should aim at establishing a "minimum" level for fixed income holdings, recommending 20-25% of the total portfolio.  One would then need to establish a weighted index for performance measurement.

Mr. McHenry thanked Mr. Bailey for the continued assistance that Cambridge Associates has given the Committee, the Secretary, and the Board of Regents.  He then asked for comments on Mr. Bailey's presentation.  Mrs. Gould felt that the establishment of a minimum level for an asset class should be beneficial and would be welcomed by the managers.  Mr. Worley from Miller, Anderson pointed out that it was likely that bond holdings would be lower if managers were subject to that kind of weighted measurement described by Mr. Bailey.  Mr. Moriarty said that the fewer restrictions placed on a manager the more clearly the burden for performance was identified.  The Chairman then asked the representatives from Fiduciary Trust and Miller, Anderson to elaborate on their fixed income management philosophies.