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industrial issues, along with a lower U.S. dollar, have not yet been reflected in stock prices. Energy stocks are particularly underpriced. There is a lot of surplus cash being generated. Mr. Forrestal added that low price/earnings ratio stocks are historically sound; MAS uses their Select Value Fund to recognize this. 

Mr. English asked how much of the portfolio is invested in the Select Value Fund. Mr. Forrestal responded that 15% of equities, or 9% of the total portfolio, is represented by the Select Value Fund holding. Mr. Forrestal added that the Institution's portfolio remains South Africa-free, and that market sector weightings are relatively unchanged over the last few months. Mrs. Gould asked if MAS holdings vary from account to account. Mr. Forrestal said that the holdings did not vary much.

Mr. Kichline discussed fixed income performance and stated that government maturities have been lengthened lately to take advantage of the inversion in the yield curve. There has been a corresponding shortening in corporate bond maturities, down to seven from ten years. When asked by the Chairman, Mr. Kichline explained that the fixed holdings in foreign obligations are mostly Canadian issues.

Mrs. Gould asked how high MAS felt interest rates were likely to go. Mr. Kichline responded that rates should peak next year, after gaining a percentage point or so. MAS thinks the Federal Reserve acted quickly enough to prevent a long-term rate rise. Mr. McHenry asked MAS' economic outlook for the balance of the year, and how this would likely affect equity performance. Mr. Forrestal stated that given inflationary pressures, interest rates would continue to rise somewhat. The slowdown of the economy will depress earnings, although certain equity sectors may well benefit.

Mr. English asked if the asset allocation of other MAS discretionary accounts is the same as the Smithsonian's allocation. Mr. Forrestal said that most MAS discretionary accounts averaged about 60% equities and 40% fixed income, as opposed to 55%/45% for the Institution. The Chairman thanked Mr. Forrestal and Mr. Kichline for their presentation.

The Committee discussed Mr. Forrestal's request for additional guidelines on asset allocation. Mr. English expressed dissatisfaction with MAS' equity performance. Mrs. Gould requested that the Treasurer obtain an opinion on MAS performance from Cambridge Associates. Mrs. Gould stated that she would like to see additional evaluations and comparisons of the present managers. Mr. McHenry agreed, and asked that such a report be prepared drawing upon whatever Cambridge Associates material is available. After further discussion, the Committee decided that MAS had not been a Smithsonian manager long enough to judge its performance fairly; however, no further asset allocation guidelines would be given to the managers at this time. 

The Committee then noted in particular Batterymarch's favorable performance, and considered the necessity for an additional manager to provide for further diversification. There remain funds previously managed by the Nova Advisors (presently allocated between the other investment managers), as well as $1.5 million from a bequest that could be allocated to a new manager, should an appropriate candidate emerge. After further discussion, the