What Is an Investment Mandate?

Investment Mandates Explained

Investment adviser discussing an individual's investment mandate with her during a meeting.
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An investment mandate is a set of instructions laying out how a pool of assets should be invested. It sets out rules to guide choices during investing. These rules then inform the actions of an investment manager.

Learn about the different types of investment mandates and whether you need one.

Definition and Example of an Investment Mandate

An investment mandate is an order to manage a pool of funds using a certain plan that is put in place to help guide the actions and choices of the fund's manager. It also lays out the level of risk that the owner of the money would permit. The mandate can vary and depends on the goals the owner has for that money.

For example, suppose a client approaches a wealth management firm with $500,000. The client intends to use the money later that year and wants it kept safe until then. The client is laying out a mandate: to preserve the capital rather than risk losing it in order to grow. This mandate is known as "capital preservation."

When they are used, mandates direct those in control of these investments and help guide them to make the best choice.

Alternate names: mandate, fund mandate

How Investment Mandates Work

Whether they are used by private investors or the managers of large funds, mandates work by laying out a framework for how to allocate and invest money. The manager must follow the guides laid out in the mandate when choosing assets to buy, hold, or sell.

Investment mandates play a big role in the control of pooled funds. Mandates may include rules on:

  • Priorities and goals
  • Benchmarks
  • Acceptable levels of risk
  • Types of funds to be either used or avoided

Mandates can be used for private investors working with financial planners or for funds run by professional managers. Index funds have investment mandates. So do exchange-traded funds (ETFs) and university endowment portfolios.

Recall the example above, of the client who trusts his $500,000 with a wealth management firm under a capital preservation mandate. The firm can then tailor the client's portfolio to the mandate. Seeking to preserve capital within a short time frame, it can choose low-risk, low-volatility investments, and cash holdings.

Stocks are too volatile to be used to preserve capital. Their prices can vary too much. For example, shares of a firm such as Johnson & Johnson, one of the very few S&P 500 firms with a Triple-A bond credit rating, should be worth more money in 10, 15, or 25 years. But in the short term, the stock price could fall. Without enough time for the value to build back up, the client could lose money.

Investment mandates are also used by the managers of large funds to guide how they choose the securities that they include in their funds. For instance, funds with a mandate to offer as much growth as possible will invest in high-risk, high-reward stocks rather than a mix of stocks and bonds.

You can choose where to put your money based on a fund's mandate.

Types of Investment Mandates

An investment mandate can restrict a money manager to certain asset classes, areas, industries, sectors, valuation levels, market capitalizations, and more.

  • Small-capitalization stock: This mandate requires finding attractive firms that are below a certain market cap size.
  • Low turnover: This usually means restricting the percentage of the portfolio that can be sold in any given year to 3% or 5%.
  • Global investment: This mandate means you should own stocks in both your home country and abroad.
  • International investment: This restricts the portfolio to firms that are based, or doing business mostly outside, your home country.
  • Long-term growth: This mandate prioritizes appreciation over things such as current income or volatility risk. Stocks are a common type of holding when looking for long-term growth.
  • Income: This prioritizes current passive income from sources such as dividends, interest, and rents over long-term growth.
  • Environmental, Social, and Governance (ESG): An ESG mandate instructs managers to invest in securities that are ethical, socially responsible, and sustainable. They may do this by avoiding shares of companies that earn their money using things such as fossil fuels, guns, or prison labor. ESG mandates might also prioritize things such as ethical and inclusive leadership, environmental protection, and community investment.

Any of these mandates can be used by individuals or by fund managers to guide how money is invested in order to meet short-term or long-term goals.

Do I Need an Investment Mandate?

Mutual funds, exchange-traded funds, and other pooled assets always have investment mandates. These not only guide how the accounts are to be run, but they also let you know how your money will be used, which can help you decide where to put your capital.

Individual investors should also have their own mandates. The mandate you decide on for your own accounts should fit with your current lifestyle, goals, and investment policy statement.

If a financial manager is in charge of your accounts, they need some rules in place to do their job. Once they can see how you intend to use your money, your time frame for investing, your level of risk tolerance, and any ethical rules you have for where your money can be used, they will be able to guide you toward the right choices.

Even if you are investing on your own without a financial advisor, drawing up an investment mandate can help you manage your money and make the right decisions. Investing can be emotional, and you can't predict what the stock market will do. Setting out a framework for where and how you will invest, when you will buy and sell, and what goals you are trying to reach will help you make smart choices.

Key Takeaways

  • An investment mandate is a set of rules laying out how a pool of assets should be invested.
  • Mandates may include guidelines on priorities, goals, benchmarks, risk, and types of funds to be either chosen or avoided.
  • Mutual funds, exchange-traded funds, and other pooled assets always have investment mandates.
  • Individuals should also have investment mandates to ensure that they invest their money wisely and adhere to their strategic goals.