My 38 has the Universal 32 hp engine too. If I were repowering, I wouldn't put less than a 37 hp engine in, and I might consider a 40-44 hp. I have a 3 blade Kiwi prop, and with a clean bottom I'm lucky to get >6 knots @ cruising rpm (2200) in flat water. I think there are others on this board who have reported better performance, but this has been one of the few disappointments I have with this boat.
To be fair, it wasn't designed as a motorsailer. It was designed as an auxiliary sailboat, and it does sail very well. As such, the 32 horse engine is adequate at around 2 hp per thousand lbs. of displacement. But I would definately not consider installing less horsepower than it already has. Especially if you're considering longer cruises, which are usually attended by more weight, which is going the wrong direction for a powerplant with "adequate" power. Plus, a smaller engine will only make it more difficult to punch into a chop in headwinds, run a large alternator, or maintain the boats' resale value.
Dan Morehouse
1981 E-38 "Next Exit"