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II. Global Mandates for Fiduciary Trust International and Miller, Anderson & Sherrerd

Fiduciary and Miller, Anderson & Sherrerd (MA&S) were given global mandates for the investment of their portions of the Smithsonian endowment fund after the November 1994 IPC meeting. The Committee approved the investment guidelines developed by the Office of the Treasurer for implementation of the mandate by each manager.

MA&S has elected to use its institutional mutual funds to implement its strategy. These funds use securities lending and investment in unrated bonds in a limited way. The Committee approved the use of securities lending and investment in unrated bonds up to 4% of the fixed income portion of the portfolio with strict reporting requirements.

Fiduciary Trust has elected to invest endowment funds directly in foreign markets. The Committee expressed some concern that Fiduciary would not be able to achieve adequate diversification in its international investments, particularly in emerging market equities. Of greater concern, however, is Fiduciary's recent investment performance. Fiduciary has approximately 50% of the total endowment, yet has poor recent performance. The Committee requested further analysis of Fiduciary's performance, including rolling five-year performance and peer comparison. 

III. Miller, Anderson & Sherrerd

Representing MA&S at the meeting were Dean Williams, Horacio Valeiras, and David Germany. Dean Williams reviewed some trends within the firm: hiring administrators to manage the business of the firm, hiring younger investment managers, and focusing research efforts on asset allocation.  

Mr. Valeiras reviewed the structure of the assets managed by MA&S, pointing out that the asset allocation is tilted toward fixed income with a move to lengthen bond duration. MA&S currently has a defensive stance with regard to the equity market. The portfolio is underweighted in international equities because it is hard now to find good values. The poor performance in 1994 is attributed to currency hedging, and overweighted positions in Hong Kong and small cap stocks. Overall, MA&S has added about 40 basis points per year with its asset allocation decisions over the past five years and has historically added 100 to 200 basis points with its security selection. 

Mr. Germany discussed the fixed income segment of the portfolio, pointing out a recent emphasis on US Treasury issues and the dramatic reduction in prepayment risk in mortgage issues. The portfolio's duration is slightly longer than the market's. Real interest rates are high. This year, MA&S expects interest rates to rise 50-100 basis points, but expects rates to drift down over the long term. Performance in 1994 was hurt by (1) lengthening duration too soon, (2) the move to global investment when the U.S. was the second best market in the world, and (3) mortgage prepayment.

Derivatives have been controversial and highly visible in the media lately. MA&S does use derivatives (securities deriving their value from the performance of some underlying asset) but only when the derivatives allow the