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COVINGTON & BURLING

Smithsonian Institution
April 18, 1972
Page Sixteen

yields over a substantial period for high-rated bonds and high-grade equity securities of the type which would be selected under a prudent investment policy.  Generally, it would probably support the propriety of the method for determination of income to de-emphasize the significance of short-term market fluctuations by relating the chosen percentage to average fund values over a substantial period.  To the extent that unrealized appreciation or depreciation of marketable securities is to be taken into account, we consider it also important that the Institution apply appropriate blockage discounts for blocks of securities large in relation to the available market in order to reflect realistically the proceeds that would be received on a sale. 

In approaching the determination of the prudent portion of yield and appreciation to be treated as income, the Smithsonian should take into account the relationship between the historic dollar value of funds after adjustments are made for inflation or deflation and the present market value of funds.  One method might be to provide in advance that yield is an independent ceiling to income of an endowment fund if its assets values fall below its original historic dollar value after adjustments for inflation or