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endowment portion of the Consolidated Fund.  While these policies are now being carried out, both of these managers have strongly pointed out the restrictive nature of such yield requirements in attempting to achieve optimum investment results for the Institution. 

Legal Opinion

At the request of the Investment Policy Committee, Smithsonian has now obtained a legal opinion, copy attached, from the Washington firm of Covington and Burling which states in part:

"We are of the opinion, where the governing instrument does not otherwise specify how income on the endowment fund is to be determined, that the Smithsonian Institution may properly substitute for actual yields a prudent portion of total yield and appreciation to be treated as income of permanent endowment funds."

and further

"...we are of the opinion that the Smithsonian may properly use a prudent portion of yield and appreciation as income under an investment policy which seeks maximum total return consistent with an acceptable level of risk."

Thus there now appears to be no legal impediment to adoption of the Total Return investment policy for true endowment funds, subject only to certain minor exceptions set forth in the opinion.

Justification for Total Return Policy

In addition to other materials previously supplied to the Committee on the subject of Total Return, there is attached a copy of a talk by Mr. E. Kirkbride Miller, our investment advisor with the firm of T. Rowe Price & Associates, which is a further excellent discussion of this subject.  

The policies of seeking maximum total return for investment and of determining income as a prudent percentage of such total return have been adopted in one form or another by more than twenty of the leading universities in the country, including Yale, Dartmouth, Cornell, Massachusetts Institute of Technology, Stanford, and many others.  Most of these have thus far limited the usage to quasi-endowment funds in the same way as the Smithsonian.  Dartmouth and Princeton, however, have within the last three years widened the usage of these polocies to true endowment funds as well as quasi-endowment funds.

Legislation is also moving in this direction with the passage of laws in New York State and New Jersey legalizing the Total Return method