What Is an Investment Mandate?

How an Investment Mandate Is Used to Guide an Account or Fund

Being clear on your investment mandate, and getting it right so it aligns with your goals and objectives, is a bedrock of intelligent risk management.
Being clear on your investment mandate, and getting it right so it aligns with your goals and objectives, is a bedrock of intelligent risk management. BURGER/PHANIE/Getty Images

As you research and study investing methods and lessons, there's no doubt you'll come across a concept known as an investment mandate.  Index funds have investment mandates.  Rich investors with their individually managed accounts have investment mandates.  ETFs have them; university endowment portfolios, too.  What are they?  How do they work?  Why are the specifics of investment mandates so important and worthy of consideration?

 Those are fantastic questions!  In the next ten minutes, I want to provide you with a little bit of background in order to give you a better understanding of the role an investment mandate plays in the management of an account, portfolio, or otherwise pooled pile of capital.

Definition of an Investment Mandate

An investment mandate is an instruction to manage a pool of capital, or a particular pile of funds, using a specific strategy and within certain risk parameters.  For example, if a client showed up to a wealth management firm and said, "I have $500,000 I want kept safe so I can use it to put a down payment on an office building for my company later this year", the mandate is called capital preservation.  There is a limited list of investments that could be considered when constructing a portfolio that sought capital preservation.  You would not, for example, buy shares of even the most gilt-edged intermediate-term bonds or the most royal of blue chip stocks because the time frame doesn't allow you to mitigate volatility risk.

In other words, a reasonably intelligent business analyst can say with a high degree of certainty that shares of a firm like 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 no one has any idea what it will be worth in terms of market quotation next week or even two years from now.

 It's the nature of the auction mechanism of common stocks.  It cannot be avoided.  This is why the legendary financial thinker Benjamin Graham said that in the short-term the stock market is a voting machine, reflecting popularity, but in the long-term, it's a weighing machine, reflecting intrinsic value.

Examples of Investment Mandates

Aside from capital preservation, which we already discussed, an investment mandate can encompass a purpose.  Here are three of the most popular:

  • A Long-Term Growth Investment Mandate: The portfolio manager is to prioritize the long-term capital appreciation of the underlying securities over things like current income or volatility risk.  If the portfolio is down 30% tomorrow, it matters not, only that it is safe and sound; that 10 years from now, it is worth considerably more as the underlying quality of the holdings resulted in satisfactory results.
  • An Income Investment Mandate: When an investor needs to live on his or her money, especially if retirement has already arrived, an income mandate makes the most sense unless there is so much wealth sitting around that it's not a worry.  Under this mandate, the portfolio manager must prioritize current passive income from sources like dividends, interest, and rents, over long-term growth.  This can mean selecting mature, slow-growing businesses with a long history of ever-increasing dividends, corporate bonds, preferred stock, or real estate with good capitalization rates.
  • Speculation Investment Mandate: As the old song goes, some girls (or boys) just want to have fun.  Whether it's for the thrill, a desire to get rich quickly, or an enjoyment of spotting intelligent opportunities and attempting to turn them into outsized profits by being smarter than the system, a speculation mandate can encompass almost anything from trading penny stocks to buying out-of-the-money short-term call options.  Sometimes, an account with this mandate is "side money", that is the person who owns it already has their primary portfolio safely tucked away and compounding for them so they keep what they consider play money (is there really any such thing?) in a segregated account.

An investment mandate can restrict a portfolio manager to specific asset classes, geographic areas, industries, sectors, valuation levels, market capitalizations, and/or anything else you can conceive.

 For example: A global investment mandate means you should own stocks both in your home country and abroad, while an international investment mandate means restricting the portfolio to firms headquartered or doing business mostly outside of your home country.  A small capitalization stock investment mandate means finding attractive firms that are below a certain market capitalization size.  A low turnover investment mandate might mean restricting the percentage of the portfolio that can be sold in any given year to 3% or 5%; certainly less than 10%, the latter of which would imply an average holding period of at least a decade for each position.

The mandate you decide upon for your own accounts should be consistent with your current situation, goals, and Investment Policy Statement, or IPS.