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COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Two

I.

Our opinion is based, in the absence of clearly applicable statutes or decisional precedents, on the application of the investment principles commonly described as the prudent man standard to present and foreseeable investment problems of the Smithsonian. These principles must reconcile the achievement of present charitable purposes with the continued achievement of the same purposes into the indefinite future. A charitable institution such as the Smithsonian must reconcile these objectives in the light of economic conditions. Such considerations suggest the prudence of investing a large portion of endowment funds in equity securities rather than fixed interest securities. The present income tax structure, however, as well as other factors, tend to force issuers of equity securities to reinvest a major portion of their net earnings, with the result that the best investments from the standpoint of overall preservation of capital may have relatively low yields. It thus has come to be recognized that the use of yield alone for determination of income is not, under past, present and foreseeable circumstances, the best method of balancing present needs of the charitable purpose with the preservation of capital for continued satisfaction of such needs. Rather, reliance on yield for income determination