Little Rock I

     The acrobat stepped out onto the wire, hesitating a bit as she brought her right foot off the tiny platform and placed it ahead of the left foot.  Another evening’s work, she thought, shaking slightly the twenty foot pole she carried perpendicular to her own body as well as to the wire.  She wanted her balance to be dynamic as she moved across to the other platform, which, somehow, looked farther away than usual, although of course it wasn’t.  Dynamic, not static.

     To the 14,000 people seated in the huge oval below, her task appeared to be one of allowing as little movement as possible.  In fact, constant movement was necessary for the acrobat to maintain her balance and to move forward along the wire to the other platform.

     The acrobat had done this hundreds of times before in a dozen arenas and tents.  Tonight for some reason, she was nervous.  Fearful and threatening images disturbed her concentration.

     The wire is a symbol, a symbol of the bridge between reality and the world we imagine we can build.  Our understanding of finances is one of the ways in which we try to build that bridge between reality and aspiration.  We need that understanding to comprehend our own institution and its dynamic, its need to imitate life by crossing the wire to the world we imagine we can build.

     We work hard to maintain a healthy equilibrium in drawing  income from our major funded sources.  The Annual Program Fund accounts for some 40% of our budgeted income;  we are limited by our ByLaws to planning income from the APF equal to the preceding year’s dollar contribution to our income plus an assumed increase of 7%.  The seven percent limit is one of the ways we keep our income budgeting from being too optimistic. 

     In looking ahead, we expect that in the 1988-89 fiscal years, our APF income will probably exceed our investment income as a proportion of our total income.  It does not mean things are not moving on the investment front.  In this area, however, trend lines are slower to assert themselves and more uncertain, slower to assert themselves because we employ a moving three year average in the recognition of income, damping the effort of the recent sharp rises in the equities.  More uncertain because the securities markets are uneven underfoot and subject to crosswinds making the maintenance of one’s balance a bit tricky.

     The Investment Committee, under the eye of the Board of Trustees, has been engaged in a program of our invested assets.  This has taken two forms.  The first has involved changes in the professional support organization on which we rely -- retention of a consultant as independent professional advisor to help with investment policy, management and the statistical monitoring of the performance of our funds.  We have also replaced two of our portfolio managers with three others;  these latter changes have been in place for almost two years and we are beginning to form opinions to how these managers are doing.  We need to see them through a full market cycle before we can begin to draw meaningful conclusions.

     The second form of changes has involved diversifying the kinds of investments we employ,  continuing to hold publicly traded stocks and bonds, but also moving into unlisted issues.

     These alternative investments, as the Investment Committee refers to them, consist, in broad groupings, of real estate, venture capital, and oil and gas investments.  We now have this diversification program largely in place, although some of our commitments will be paid over roughly the next year and a half.  By that point in time, these alternative investments will amount to approximately 15% of our total invested assets.  The purpose of this program is to spread risk, position ourselves counter cyclically to fluctuation in publicly traded issues, and to seek others, in some case more aggressive opportunities for capital appreciation.

     Now that’s what we have been doing, how we are positioning ourselves in our investment portfolios.  I want to put us right out on the wire now, and talk about the current context.

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