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for nonprofit institutions. A proposed new uniform law on the subject, now in course of preparation, will also provide for the Total Return concept. 

Determination of Prudent Income 

The policy adopted by the Investment Policy Committee allowing for the distribution of income amounting to 4-1/2% of the running 5-year average of market values of the funds as of March 31 of each year appears conservative. While it is higher than the Princeton pay-out of 4%, it is below the 5% recommended by the report to the Ford Foundation and below the 4.9% pay-out in use by Dartmouth. In those cases, furthermore, the percentages are based on a 3-year average rather than Smithsonian's 5-year average which should tend to reduce fluctuations. 

As pointed out by Mr. Kirkbride Miller in his talk, furthermore, T. Rowe Price believes that "a 10% compound annual total return growth objective is a reasonable goal in light of economic conditions that have prevailed since World War II, and we felt that it is a goal that can be achieved without taking a high degree of risk." While history is no assurance of the future and while common stocks on the average have achieved a lesser degree of appreciation during the most recent 5-year period, it is significant that over the past 100 years common stocks have provided overall returns of about 9-1/2%. For the past 20 years, the Dow-Jones Industrial Average and the Standard and Poor's 500 Stock Average achieved total returns (dividends and appreciation) of 8.7% and 9.7% respectively. The Freer Fund itself, despite the constraints on investment in order to achieve relatively high yield, has shown an 8.15% increase compounded annually over the past 26 years made up of 4.35% compounded appreciation and 3.8% average annual yield (versus total return of 10.3% for the Dow-Jones Industrial Average in this period). 

On the assumption that a continuing long-term total compounded annual return of 9%-10% can be achieved, the difference between this total figure and the 4-1/2%  distributed as income would, of course, serve to increase future fund values and income to meet future expansionary or inflationary cost increases. 

Effect on Smithsonian Investment Funds 

Adoptions of these policies would have the following effect upon the income of our various investment funds:

 [[5 column chart]]

 |Fund Valuations |  | Act. Income |Inc @ 4-1/2%
 |5 Yr Avg Val|Value 3/31/72|FY 1972|FY 1973
Freer Fund|$19,291,000|$21,614,000|$725,000|$868,000
Consolidated Fund|11,892,000|12,899,000|573,000|535,000
Spec. Endow. Fund|1,346,000|1,408,000|61,000|61,000
Endowment Fund #3|9,999,000|13,873,000|395,000|450,000