What Is an Investment Mandate?

Definition & Examples of an Investment Mandate

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. The mandate sets out parameters and guidelines for how money can be invested, which informs the decisions of an investment manager.

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

What Is an Investment Mandate?

An investment mandate is an instruction to manage a pool of capital using a specific strategy and within certain risk parameters. The mandate will vary depending on the goals the owner has for that money.

Investment mandates play an important role in managing pooled funds. They may include instructions on:

  • Priorities and goals
  • Benchmarks
  • Acceptable levels of risk
  • Types of funds to either be prioritized or avoided
  • Any other guidelines for how assets should be managed

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

Whenever they are used, mandates direct the managers of these investments and help guide their decision-making.

Alternate names: mandate, fund mandate

How Investment Mandates Work

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

For example, 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 particular mandate: to preserve the capital, rather than risk losing it in order to grow, known as capital preservation.

Stocks are too volatile for capital preservation, even if they would be suitable for a different mandate. For example, shares of a firm such as Johnson & Johnson, one of only four S&P 500 components with a Triple-A bond credit rating, should be worth considerably more money in 10, 15, or 25 years. But in the short term, they could be worth less, which would not preserve the client's capital.

The wealth management firm can then tailor the client's portfolio to the mandate, seeking capital preservation within a short time frame with low-risk, low-volatility investments and cash holdings.

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

Investors often choose where to put their money based on a fund's mandate.

Types of Investment Mandates

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

  • A small-capitalization stock investment mandate means finding attractive firms that are below a certain market capitalization size. 
  • A low-turnover investment mandate usually means restricting the percentage of the portfolio that can be sold in any given year to 3% or 5%.
  • A global investment mandate means you should own stocks both in your home country and abroad.
  • An international investment mandate restricts the portfolio to firms headquartered or doing business mostly outside of your home country. 
  • A long-term growth mandate prioritizes the long-term capital appreciation over things like current income or volatility risk. Stocks are a common investment holding for long-term growth.
  • An income investment mandate prioritizes current passive income from sources such as dividends, interest, and rents over long-term growth. 
  • An Environmental, Social, and Governance (ESG) mandate instructs managers to invest in securities that are ethical, socially responsible, and sustainable. They generally avoid shares of companies that earn their money from things fossil fuels, guns, and prison labor while prioritizing ethical and inclusive leadership, environmental protection, and community investment.

Any of these mandates can be used by individual investors or by fund managers to guide how their money is invested in order to meet short- 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 managed, they let investors know how their money will be used so they can decide where to put their capital.

Individual investors should also have investment mandates. The mandate you decide upon for your own accounts should be consistent with your current situation, goals, and Investment Policy Statement.

If a financial manager is in charge of your accounts, they need guidelines in order to their job. Once they understand how you intend to use your money, your timeframe for investing, your level of risk tolerance, and any ethical parameters you have for where your money is used, they will be able to guide you towards appropriate investments.

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 appropriate decisions. Investing can be emotional, and the stock market is unpredictable. Setting out parameters 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 decisions.

Key Takeaways

  • An investment mandate is a set of instructions laying out how a pool of assets should be invested.
  • They may include instructions on priorities, goals, benchmarks, risk, and types of funds to either be prioritized or avoided.
  • Mutual funds, exchange-traded funds, and other pooled assets always have investment mandates.
  • Individual investors should also have investment mandates to ensure that their money is invested appropriately.

Article Sources

  1. California State Teachers' Retirement System. "Private Equity Investment Policy," Pages 8-11. Accessed July 4, 2020.

  2. DC.gov. "Glossary of Investment Terms." Accessed July 4, 2020.

  3. Fidelity. "Active Share: A Misunderstood Measure in Manager Selection," Pages 5-6. Accessed July 4, 2020.

  4. Principles for Responsible Investing. "Sample Investment Mandate Clauses." Accessed July 4, 2020.

  5. iShares by Black Rock. "iShares Core S&P Small-Cap ETF." Accessed July 4, 2020.

  6. T. Rowe Price. "Global Stock Fund." Accessed July 4, 2020.

  7. Morgan Stanley. "Europe Opportunity Fund." Accessed July 4, 2020.

  8. T. Rowe Price. "Large Cap Growth Fund - I Class." Accessed July 4, 2020.

  9. Vanguard. "Vanguard High Dividend Yield Index Fund Investor Shares." Accessed July 4, 2020.

  10. Fidelity. "Thematic investing: Environmental, Social, and Governance (ESG)." Accessed July 4, 2020.