By Joel Paula

Investment mandates, the contracts that define the relationship between asset managers and asset owners, are a critical tool in fulfilling long-term objectives. Without these contracts, it would be difficult to reconcile the constraints and objectives of asset owners with the capabilities of asset managers. Mandates ensure there is mutual alignment on investment goals, bolstering these collaborative partnerships over time and, when crafted with long-term goals in mind, lay the foundation for generating stronger returns.

But the terms and language included in investment mandates are often boilerplate, overlooking provisions that can make relationships more long-term and mutually beneficial.

FCLTGlobal’s research on the importance of mandates began in 2015 with the publication of the Long-term Portfolio Guide, which identified the investment mandate as one of the five key action areas for creating long-term alignment. This work was the basis for the first two editions of Institutional Investment Mandates: Anchors for Long-Term Performance, which recommends important terms and questions investors can use to navigate mandate negotiations in a way that would build trust between both parties and advance their joint investment goals.

Over the past five years, we have convened some of the world’s largest and most influential asset owners and asset managers – representing over USD 8.3 trillion in assets under management – to develop contract provisions and practical tools to help with their implementation. This work, which includes a “top ten” list of key elements of long-term mandates and a practical model for long-term contract provisions, proved so relevant among the investment community that a third edition is underway.

In this latest iteration, we aim to expand on our model for long-term contract provisions and key performance indicators, as well as develop a series of new tools that draw on these expansions, by:

• Integrating existing long-term contract provisions with investor responsibilities by drawing from our recent research on investor responsibilities, Ripples of Responsibility. Asset owners face a multitude of external forces and expectations that shape the way they invest and ultimately how returns are expected to be earned. Accepting responsibilities – such as net-zero commitments or DEI – will impact investment mandate design and the contracts that define relationships with external managers. The upcoming edition will revisit contract provisions with a look at how investor responsibilities will impact them.
• Commingled funds provide efficiency and cost reductions for many institutional investors, yet how can asset owners ensure alignment of objectives with managers in pooled fund vehicles? We will examine contract provisions in the context of commingled funds, and how asset owners and asset managers can structure funds to focus on the long term using model contract provisions and KPIs.
• An expanded toolkit will help to ensure a long-term focus throughout the owner/manager relationship, from screening and selecting managers, to onboarding and maintaining them into the future. A new top ten list on due diligence will provide questions to weed out short-term managers. An onboarding checklist will set up relationships to succeed by providing transparency between owners and managers. Finally, a manager scorecard will help to ensure that performance reviews and communications do not fall into the common pitfalls of prioritizing the short term.
• Member case studies animate our work on model contracts, and over the years FCLTGlobal members have moved to implement them in their own investment programs. New case studies will be added, expanding on the current library that includes OTPP, Kempen Capital Management, and MFS Investment Management.

FCLTGlobal’s model mandate is already having real-world impact. Co-founder Henrique Alvares of Neo Investimentos, a Brazil-based asset manager, has used reporting techniques as a way of making a first impression and emphasizing to client investors who they are as an asset manager:

“When we saw FCLTGlobal’s recommendation to switch the reporting of financial returns from longest to shortest, we immediately applied it. The emphasis we put in our long-term investment approach is now better understood by our audience, in a very simple and straightforward way” he said.

The adoption of strategic long-term behavior supports the future-oriented allocation of capital across the investment value chain, paving the way for a more sustainable and prosperous economy. Well-designed mandates are a fundamental tool in this effort.