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Mr. Forrestal briefly discussed MAS' fixed income performance. It has suffered somewhat lately as compared to the indices. MAS has recently increased the duration and average maturity of the fixed income portfolio. Yield spreads are widening in mortgage issues; MAS has increased its exposure in this area from 30.5% to 54.5%.

Mr. Forrestal informed the Committee that one fixed income holding, a zero coupon convertible bond issued by the Lomas and Nettleton Co., had been purchased in August 1988 for $357,000; the bond was then rated "BBB" but subsequently lowered to "CCC". The company has recently filed for protection from bankruptcy under Chapter 11, thereby significantly reducing the market value of this investment. Mr. McHenry inquired as to MAS' process for evaluating the quality of fixed income instruments, whereupon a discussion of bond ratings and their value followed. The Committee also focussed on MAS' other less than "A" rated holdings.

Dean Williams then explained MAS' proposal for international investments. He said that an extensive valuation process determines the range of MAS' holdings in various counties. Individual holdings in the International Portfolio are relatively small, the largest being 1.3% of the total. MAS is conscious of the cost of global transactions; securities are held for an average of four to five years.

Mr. Williams stated that the MAS International Fund is presently valued at $100 million. Mr. Mott inquired whether MAS recommended a global component for all its portfolios, and if so, what percentage. Mr. Williams replied that indeed MAS did recommend such holdings at a minimum of a 10% level, for long-term diversification.

The Chairman thanked Mr. Forrestal and Mr. Williams for their presentations. He stated that the Treasurer would inform MAS of the Committee's decisions regarding the various proposals offered during the course of the presentation. Mr. McHenry then introduced Mr. Dean LeBaron and Mr. James Ullman of Batterymarch Financial Management Corporation.

Mr. Ullman reviewed Smithsonian investment objectives, the Batterymarch investment philosophy, and the firm's present client and staffing profile. The Institution's portfolio has lagged the S&P 500 over the last year (+26.2% vs +33.0%). The portfolio's total value was $59.5 million as of September 30, 1989. Batterymarch's holdings reflect a higher commitment to technology issues than to communications issues which have performed very well. On the other hand, Batterymarch has outperformed market averages since the decline of October 1987 principally due to the positive performance of small capitalization issues, even though Batterymarch does not have a purposeful "small cap" strategy.

Mr. Ullman pointed out that constant attention to merger and acquisition activity is a critical component of the Batterymarch evaluation process. He foresees technology issues at the forefront of near-term M&A activity with non-U.S. firms purchasing substantial or controlling interests in U.S. companies.

Mr. English asked what an institutional investor's posture should be regarding the upcoming European economic reunification. Mr. LeBaron suggested