If you’re thinking about investing your money through a mutual fund, ETF or other form of managed fund, consider that fund’s investment mandate. Every fund has one: a set of rules and objectives used in the management of a specific portfolio or fund. Investment mandates are an important piece of governance for managed investments because they put fund managers and shareholders on the same page. 

There are many different types of investment mandates, and differing approaches to managing capital. Nevertheless, most mandates provide clear instruction for the investing approach. It’s a framework for transparency and helps to set expectations. Here’s what investors need to know about fund mandates and their role in determining guiding investment principles. 

Types of Investment Mandates

The purpose of a mandate is to direct the actions of a fund manager and to establish the framework for the fund’s governance. In this way, the mandate serves both the people in charge of making investment decisions and those entrusting their wealth into the fund. To that end, a mandate might focus on any number of variables or criteria. In fact, some of the most common types of investment mandates include:

• Capitalization mandate. A small-cap mandate might encourage managers to identify up-and-coming companies with significant revenue runway. Conversely, a large-cap mandate might encourage investment in stable companies within different sectors.  
• Low turnover mandate. This type of mandate puts a cap on the amount of a portfolio that’s sold each year, to reduce turnover. It might also restrict how much of the total fund value managers can trade in a given year or quarter. 
• Globalization mandate. These mandates focus on which countries the fund can invest in and how those investments take shape. It might mean tapping into emerging markets abroad or curating a well-allocated portfolio across selection first-world nations. 
• Passive income mandate. As the name implies, this type of mandate appropriates a dividend strategy or a portfolio allocation that skews towards passive income. It might dictate investment in REITs or specify a DRIP allocation across dividend-payers. 
• Environmental, Social and Governance (ESG). These mandates encourage fund managers to invest in moral and ethical companies, such as those with sustainable initiatives, while avoiding companies that actively engage in certain practices. 

There’s no real restriction for how specific or loose an investment mandate might be. Some funds operate with loose mandates to allow fund managers more freedom in how they invest. Others hold specific criteria above all, to ensure consistency and predictability. 

What’s Included in an Investment Mandate?

Investment mandates are more than generalities a fund manager needs to follow. Many times, they include quantifiable standards the fund needs to meet. Investment managers get held accountable for the fund’s performance within the context of the criteria outlined with in it. For example, some of the more specific instructions laid out in a mandate can include:

• Acceptable levels of risk
• Fund Priorities and goals
• Investment thesis and strategy
• Performance benchmarks
• Rules for asset management

These variables all culminate in a mandate that sets the tone for the fund. Investment managers know the criteria through which they’re allowed to operate and investors can set clear expectations for what they expect. 

Types of Funds With Investment Mandates

What types of funds have investment mandates? Generally, any fund that’s actively managed is governed by a mandate (some passive funds, as well). Mandates are the cornerstone for the fund’s governance, which makes them an integral part of the value proposition for investors. As a result, expect most professional funds to come with a mandate.

• Exchange Traded Funds (ETFs)
• Mutual Funds
• Index Funds
• Endowment Portfolios

Where do you find the fund’s mandate? Generally, it’s disclosed in the fund’s prospectus. Moreover, most companies will publish a revised version of the fund’s prospectus annually. This allows investors to reevaluate if their investment thesis matches up with the mandate of the fund. If it does, they can continue to invest with confidence. If it differs or changes, it’s an opportunity for investors to exit their position and rebalance with a fund that’s better-aligned with their needs. 

Private Investment Mandates

Investment mandates aren’t only for mutual funds and ETFs. Individual investors can and should bring a mandate to the table when consulting with a money manager or personal investment manager. Private investment mandates are a great way for individual investors to delineate what they’re comfortable with when it comes to how a manager invests their wealth. 

As is the case with fund managers, a private investment manager needs to operate by a set of standards that align with the investors who trust them. It’s prudent for individuals to sit down with their wealth advisor to delineate expectations for variables such as risk tolerance, investment strategy, benchmarked returns and more. While a mandate isn’t a legal contract or guarantee, it definitely dispels uncertainties between the vision an investor has for their money and the actions of the manager entrusted with it. 

Get Familiar With Investment Mandates

Whether you’re buying into a managed fund or entrusting your portfolio to a money manager, it’s important to consider the investment mandate. Does the managed fund share your views on capital allocation and portfolio allocation? Do you have a specific objective you want your money manager to adhere to? A mandate ensures expectations are the same on both sides. Managers have a clear set of instructions for how to handle money, and investors know what to expect from that manager’s actions.

No matter which fund you are investing in, there are mandates to consider. Therefore, it’s important to stay up-to-date with these rules and regulations. To further advance your investment knowledge, sign up for the Investment U e-letter below!