Basic, lesson 1 of 4
Mandates and benchmarks
An asset manager invests other people's money under a written mandate and is judged against a benchmark index. Both decide what the job actually is.
8 min, 3 checks
1Who the clients are and how the firm is paid
An asset manager runs money for others: pension funds, insurers, endowments, sovereign funds, and individuals through mutual funds and ETFs. It does not lend its own balance sheet. It earns a fee on assets under management, AUM, usually a fixed percent a year.
Annual fee revenue = AUM x Fee rate
Worked example
A large cap equity fund
- 1AUM: $2 billion. Fee: 0.60% a year.
- 2Fee revenue: 2,000 x 0.006 = $12 million.
The fund earns about $12 million a year whether the market is up or down, though a falling market shrinks AUM and with it the fee.
Check 1
A bond fund manages $500 million and charges 0.45% a year. What is its annual fee revenue, in millions of dollars?
2The mandate
The mandate is the contract between client and manager. It names the asset class, the universe, the benchmark, and the limits. A portfolio manager who breaks it can lose the account even in a year of good returns.
| Item | Example |
|---|---|
| Universe | US large cap equities |
| Benchmark | S&P 500 total return |
| Style | Value, growth, or core |
| Position limits | No stock above 5% of the fund |
| Risk budget | Tracking error target of 3% to 5% |
| Exclusions | No tobacco, no stocks outside the universe above 10% in total |
Check 2
A US large cap value fund's PM loves a $600 million market cap software company. What is the problem?
3Measured against the benchmark
A fund that rose 9% did well only if its benchmark rose less. The difference is the excess, or active, return, usually quoted in basis points. Clients buy an index fund for the benchmark's return; they pay an active manager to beat it.
Excess return = Fund return - Benchmark return
Check 3
A fund returns 9.0% and its benchmark returns 7.5%. What is the excess return, in basis points?
Terms in this lesson: Exchange-traded fund, Balance sheet, Assets under management, Equity value, Basis point.
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