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COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Seven

The result of these developments, insofar as income is deemed to be limited to actual yields, is that charitable institutions are forced to make the difficult choice of either (1) maintaining the value of their endowment funds, but thereby foregoing an adequate level of income, or (2) maintaining an adequate level of income, but accepting a decreasing value for their endowment funds.  A middle course available is for an institution to diversify its holdings, investing part in high yield bonds and part in equity securities.  To the extent this course is followed, however, a charitable institution sacrifices both the principal value of funds and the income generated therefrom.  The use of a prudent portion of yield and appreciation as income would permit the Smithsonian to invest for the maximum total return on investments consistent with an acceptable level of risk with concomitant maximum satisfaction of both its present and future obligations.

The desirability of determining income as a prudent portion of yield and appreciation lies in its permitting an institution to preserve the purchasing power of its endowment funds without compromising its obligation to generate sufficient income. 15/   Inherent in the actual yield approach