Investment Mandate

Published on :

21 Aug, 2024

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An Investment Mandate is a set of rules or instructions that is laid out for investments. They specify acceptable investments, their restrictions, position risk constraints, and an appropriate benchmark, among other things. They are regulations that guide investment managers' choices.

This gives managers the ability to choose the investment portfolio by outlining risk tolerances, investment objectives, and other related information. They also clearly illustrate the kind of securities that can be utilized to meet the objectives of the client. Knowing the investment mandate facilitates optimal decision-making, directing the achievement of goals and guaranteeing the manager's investment objectives are fulfilled.

What Is An Investment Mandate?

An investment mandate meaning refers to guidelines outlining investment-specific needs, such as preferred asset allocation, liquidity or concentration limitations, financial objectives, and risk tolerance.
It acts as a comprehensive road map for handling investments and making sure they are customized for investors' unique requirements.
There are different types of mandates, such as those on small-capitalization stock, low turnover, income, long-term growth, international investment, global investment, and ESG mandates.
They are essential for clarity, alignment with client objectives, risk management, legal compliance, investment focus, performance evaluation, transparency, and defining specific goals and restrictions.

Investment Mandate Explained

Investment mandates are guidelines for allocating and investing money used by private investors and large fund managers. They guide asset choices and play a significant role in controlling pooled funds. Mandates may include rules on priorities, benchmarks, acceptable risk levels, and fund types that need to be avoided. They can be used by private investors who collaborate with financial planners or professional managers. These mandates apply to index funds, exchange-traded funds (ETFs), and university endowment portfolios. Mandates are essential for managing funds effectively.

Having a clear path for strategic investments, customized portfolios, and a clear grasp of investment options and their place in the portfolio are all advantages of having an investing mandate. The investment portfolio will be customized to match investor's unique needs if their risk tolerance, financial objectives, and preferences are well understood. This facilitates the transition from transactional investments to strategic investments and assists the investors in making that transition. In addition to helping them choose the best fund categories for their specific needs, creating a mandate also helps them understand the broader investment perspective.

Weak or nonexistent investment mandates can make investors often move between several fund categories based on current trends. Since the most advantageous categories could have run out, this could lead to returns that could have been better. Investing outside of one's specific needs can result in less-than-ideal returns. Determining the appropriate fund categories for an individual depends on their risk tolerance, financial objectives, and investment philosophies. Investors may opt for less-than-ideal fund categories when better options are available if they need an understanding of the broader investing universe and its advantages and disadvantages.

Types

Some of the types of mandates for investments are given below:

Small-Capitalization Stock: This type of mandate calls for identifying relevant companies with market capitalizations less than a specific threshold.
Low Turnover: This usually translates to a 3% or 5% annual cap on the portion of the portfolio that can be sold.
Income: This puts passive income in the present ahead of long-term growth from sources including dividends, interest, and rentals.
Long-Term Growth: Under this mandate, appreciation takes precedence over variables like volatility risk and present income. One standard asset class for investors seeking long-term growth is stocks.
International Investment: Investing internationally limits investor portfolios to companies that are headquartered or mainly operate outside of their nation of residence.
Global Investment Mandate: According to the global investment mandate, investors must own stocks both domestically and internationally.
Environmental, Social, and Governance (ESG): ESG investment mandates are those that managers purchase sustainable, morally based, and socially conscious securities. They could achieve this by staying away from stocks in businesses that make money from the use of weapons, fossil fuels, or prison labor, among other things. ESG investing regulations may also give precedence to matters like community investment, environmental preservation, and inclusive and moral leadership.

Examples

Let us look into a few examples to understand the concept better.

Example #1

Suppose Daisy is an investment manager handling a client's portfolio. The investment mandate specifies that loans of securities should not exceed 35% of the market value of each portfolio. In line with this mandate, Daisy ensures that the loaned securities in the client's portfolio do not exceed the specified limit by closely monitoring the loaned positions, tracking market values, and adjusting the loaned securities as necessary to maintain compliance with the mandate. This ensures that the client's portfolio adheres to the mandated loan limits while seeking potential benefits from securities lending activities.

Example #2

The investment mandate, bestowed upon the executive director of Norges Bank Investment Management (NBIM), stands as a testament to the deliberations and decisions of the Executive Board on December 17, 2009, further refined through subsequent amendments made on September 2, 2009.

Some of the points its mandate outlines are given below:

The investment in asset classes not included in the portfolio's benchmark is prohibited, with the Ministry Regulation defining the allowable asset classes. However, derivatives related to benchmark portfolio asset classes can be utilized. Money market investments are allowed.

There should be a minimum overlap of 60% between the set benchmark portfolio and the actual portfolio for equity holdings and 30% for fixed-income portfolio issuers.

Under normal market conditions, the actual portfolio must not exceed 75% of the risk limits over time set by the portfolio owners. Call options on individual securities not held in the actual portfolio are prohibited. However, only up to 2.5% of the value of the portfolios can be issued in put and call options (measured as notional value).

Leverage beyond what is necessary to minimize transaction costs or as a natural part of usual investment management is not allowed. Reporting to the Executive Board is required for leveraging the portfolio beyond 15% of its market value.

Importance

The importance of investment mandate is as follows:

Clarity: An investment mandate brings clarity by defining specific goals, objectives, and restrictions for investment portfolios, ensuring there exists a clear understanding of the outcomes.
Alignment with Client Objectives: The mandate ensures that the investment strategy is in sync with the client's financial goals, risk tolerance, duration, etc. Following client investment mandate also improves investment manager's ratings.
Risk Management: Investment mandates establish risk parameters such as asset class limits or concentration restrictions to effectively manage risk and protect the client's portfolio from excessive exposure.
Legal and Regulatory Compliance: Mandates ensure compliance with applicable legal and regulatory requirements, preventing any violations or breaches.
Investment Focus: Mandates provide a framework for investment managers to make informed decisions by outlining targeted asset classes, sectors, investment styles, and regions.
Performance Evaluation: These set performance benchmarks and measurement criteria, enabling clients to assess the investment manager's performance against the stated objectives.
Transparency and Accountability: Investment mandates promote transparency and accountability by outlining the roles, responsibilities, and reporting requirements of both the client and investment manager.

Frequently Asked Questions (FAQs)

What is the difference between a fund and an investment mandate?

The distinction between a fund and a mandate lies in their scope. A fund represents a collective pool of funds contributed by multiple investors and managed by an investment firm. Conversely, a mandate refers to the specific guidelines and objectives established for managing investments within a fund or institutional portfolio.

When does one need an investment mandate?

It is necessary to ensure clarity, alignment, risk management, compliance, and performance evaluation in investment management. Institutional investors, such as endowments, rely on investment mandates to fulfill specific objectives, legal obligations, and fiduciary responsibilities.

How to keep up-to-date with investment mandates?

Investors should regularly review and communicate with their investment managers and monitor regulatory updates. They can also stay updated on emerging trends and best practices related to investment mandates by utilizing industry publications, conferences, and networking with peers.