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Covington & Burling

Smithsonian Institution
April 18, 1972
Page Thirteen

express terms of a trust instrument if necessary to accomplish that objective. 36/ For reasons of inflation and the general decline in bond prices, charitable institutions, under the unrelenting pressure to meet their obligation to generate sufficient income, find it increasingly difficult to preserve the purchasing power of their endowment funds. Supported by the analogy of such cases, and in the absence of clearly applicable authority, 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. Several recent statutes reflect this view through adoption in one form or another of this concept. 37/

We also believe the Smithsonian would be well advised to take into account net realized and unrealized appreciation or depreciation in the value of marketable securities in determining the prudent portion of yield and appreciation to be used as income.

The authors of The Law and the Lore of Endowment Funds, supra, at 35, "limited [their] discussion to the proper classification of realized gains alone." They considered it "quite unlikely that a court today would regard the unrealized appreciation of an endowment fund as expendable