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COVINGTON & BURLING

Smithsonian Institution 
April 18, 1972
Page Six

imprudent to invest too heavily in debt or other fixed income securities. 8/ Many of the best equity investments, however, provide minimal or no dividend yield at all, 9/ primarily because the best managed companies frequently retain a major portion of their earnings to finance growth, 10/ but also because the income tax laws applicable to corporations and most investors make this course more profitable. 11/ For a number of reasons, therefore, the investment community for the past three decades has come to place a premium on appreciation in the value of securities and to find means of commuting corporate earnings from dividends to appreciation. 12/ At the same time, however, the pressure on charitable institutions to meet their obligation to generate sufficient income for the charitable purposes of their endowment funds has been increasingly severe, especially in view of the inflationary economy. Thus, although for the past century the annual total return on unselected common stocks as a group has been double that of high-quality fixed income securities, 13/ relatively few charitable institutions have deemed it prudent--or practically feasible--to accept the reduced amount of income necessary to undertake an investment policy which seeks to maximize total return.14/