MODULE - III

Style vs Process

 Balance between individual styles vs.

institutional processes
 Checks and balances to ensure that
fund managers adhere to the fund
mandate
Contents

 Who is an Investor?  How Investment Mandates Work

 What is Investing?  Investment Mandate Example

 Types of Investors  Investment Mandates for

Individuals vs. Funds
 Individual vs. Institutional
Investors  Types of Investment Mandate

 FUND MANAGEMENT STYLE AND

STRATEGIES
 What Is an Investment Mandate?
 Purpose of an Investment
Mandate
Who is an Investor?

An investor is an individual that puts money into an entity such as a business

for a financial return. The main goal of any investor is to minimize risk and
maximize return. It is in contrast with a speculator who is willing to invest in a
risky asset with the hopes of getting a higher profit.
There are many types of investors out there. Some invest in startups hoping
that the company will grow and prosper; they are also referred to as 
venture capitalists. In addition, there are those who put their money into a
business in exchange for part ownership in the company. Some also invest in
the stock market in return for dividend payments.
What is Investing?

The act of putting money into a business or organization to earn a profit is

called investing. With a small business, an investor takes on the additional risk
of making little to no profit as the business may or may not succeed. However,
with a publicly traded company, there is a wealth of information available on
the company’s financial position that will allow the investor to make a more
calculated decision and enter and exit the market as they please.
Types of Investors

1. Retail or Individual Investor

A retail or individual investor is someone who invests in securities and assets
on their own, usually in smaller quantities. They typically buy stocks in round
numbers such as 25. 50, 75 or 100. The stocks they buy are part of their
portfolio and do not represent those of any organization.
However, many individual investors make trades based on their emotions.
They let fear and greed dictate the stocks they buy. It is not the most optimal
way to trade as stock markets are incredibly volatile, and it is often hard to
predict the direction in which the stock will move.
2. Institutional Investor

An institutional investor is a company or organization that invests money

to buy securities or assets such as real estate. Unlike individual
investors who buy stocks in publicly traded companies on the stock
exchange, institutional investors purchase stock in hedge funds, pension
funds, mutual funds, and insurance companies. They also make
substantial investments in the companies, very often reaching millions in
dollars in value. The institutional investor is not the beneficiary of the
earnings from the investment, but the company as a whole act as a
beneficiary.

However, according to the UK’s HM Revenue and Customs Office, an

institutional investor can either invest on behalf of others or in their own
capacity. If they invested using their account, then they would not be
considered an institutional investor. While some people own their shares,
others own them through institutional investors who invest their money in
other savings or investment accounts.
For example, a portion of many people’s paychecks is given to a pension
fund each month. The pension fund uses the money to buy other financial
assets to earn a profit. In this case, the pension fund is an institutional
investor as they are buying shares on behalf of the people who invested
their money in the fund.

Since institutional investors buy securities and financial assets at a much

greater scale than their retail counterparts, they often exert a significant
influence over the financial markets and the economies of nations. They
are also a major source of capital for companies that are publicly listed on
the stock exchange.
Individual vs. Institutional Investors

 The two types of investors differ in a number of ways, including:

 1. Access to resources
 Institutional investors are very large companies and can take advantage of
numerous resources such as financial professionals to oversee their portfolio
on a daily basis, allowing them to enter and exit the market at the right time.
Individual investors need to do the same on their own through research and
available data.
 2. Decision-making
 With institutional investors, the investments are usually overseen by different
individuals in the organization. For example, the board of directors makes the
decision-making process more challenging as people are likely to propose
different ideas on what trades to make. As an individual investor, you are your
boss and the sole decision maker when it comes to buying and selling shares.
3. Identifying investment opportunities

Since institutional investors are able to access a large number of

resources and capital, they are privy to investment structures and
products available before anyone else. By the time investment
opportunities reach from the hedge fund or private equity funds to the
individual investor level, the rest are able to use second-hand
investment strategies that have already been implemented by the large
institutions.
FUND MANAGEMENT STYLE AND STRATEGIES

If you are considering to invest in a scheme of a mutual funds it is important

to understand the fund management style and strategies adopted by the
fund manager in different market scenarios. Investment management Styles
in Stocks or Equity Mutual Funds vary. The criteria used by the mutual funds
manager to select the stocks vary widely as per the fund management style of
an individual fund manager. Therefore the returns and the risks associated
with investment into a scheme of a mutual fund would vary as per the fund
management style and market strategies adopted by the fund manager. There
are predominantly 4 Fund management styles followed by the investors /
fund managers all around the world.
Value investing: Value investing refers to investing in undervalued
stocks that have the potential to perform well and there is an
expectation of price appreciation in future.  The stock selection is
done on the basis of parameters like Price to earnings multiple,
dividend yield etc. It first seeks individual companies with attractive
investment potential, then considers the economic and industry trends
affecting those companies. Value managers usually begin their search
with fundamental analysis, in order to find companies whose current
share prices don’t reflect their long term potential and are
undervalued.

Growth investing: A style of investing that invests in fundamentally

sound businesses with the belief that they will go up in price. The
stocks in this portfolio are well researched, liquid and of high quality
and will usually give you a high P/E ratio and lower dividend yields in
comparison to the market. Unlike Value Investing, which is somewhat
regular and consistent in most cases, growth is much less certain.
Growth investments, however, usually outpace the returns on value
investments over the long-term. It invests mainly in common stocks
For FY 2019-20 , as on April 1, 2020

PE Ratio = 200 Rs Price per share/ EPS = 20 rs per Share = 10 PE

Market Cap = Rs 2000 Crore , How much is the PAT of Company in

FY1920 ?

Market Cap = Market price * number of shares

2000 Crore = 200 Rs per share * 10 Crore ?

Bottom-Up: The focus of the Bottom up approach to stock selection is
always on individual companies with attractive investment potential. An
investment strategy that first seeks individual companies with attractive
investment potential, then considers the economic and industry trends
affecting those companies is called as the bottom up approach to stocks
selection.

Top-down investing: The reverse of bottom up approach to stock selection

is Top-Down investing. In the top-down style of investment management,
the mutual fund manager places primary importance on country or
regional allocation. Top-down managers generally focus on global
economic and political trends in selecting the countries or regions where
they expect to find investment opportunities. And then within a country
these fund managers look at the sectors or themes where they see the
potential. Only then do they employ a more fundamental analysis of
individual stocks in order to make their final investment decisions.
In addition to the four fund management styles mentioned above
the fund managers also adopt certain strategies to manage funds.

Active or Passive Funds Management: An Active Fund manager adopts

one of the strategies listed above and aims to deliver returns superior
than the market. Whereas a passive fund management style would be to
imitate the movements of the market measured by an index such as NIFTY
or Sensex in India. Passive funds are also called as the Index Funds.
Tactical Asset Allocation: In addition to the fund management styles fund
managers at certain time use these strategies called as tactical 
asset allocation. Tactical Asset Allocation shouldn’t confused with overall
asset allocation and investment style. Tactical asset allocation attempts
to move in and out of the asset classes at opportune times for optimal
gains. These managers tend to be highly quantitative in their approach,
basing their decisions on computerized models that assess relative values
and states of market psychology. Although these managers object to
being called market timers, they are effectively betting they can predict the
markets’ overall movements. The ability of any manager to do this with
consistent success is a matter of continued debate.
What Is an Investment Mandate?

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.
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.
If you plan to use investment services or plan to invest in mutual funds, ETFs,
or any other pooled investment vehicle, you will be impacted by investment
mandates.
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.
Purpose of an Investment Mandate

Investment mandates, also known as mandates or fund mandates, exist to

ensure investment managers abide by the desired strategy and stay within
specific risk parameters. Investment mandates accomplish this by providing
instructions on items, including the portfolio’s priorities and goals, the
benchmarks to be used, and any specific investments or types of investments
that should be either included or avoided.
The term, investment mandate, most often refers to the instructions for
managing pooled capital, such as mutual funds, exchange-traded funds (ETFs),
index funds, and university endowments’ portfolios. Investment mandates are
also used by individuals who hire an investment manager to oversee their
portfolio.
The purpose of an investment mandate for pooled capital investments is to
ensure all parties remain on the same page - investors, potential investors,
and the investment manager. There is no confusion on the portfolio’s goal,
the level of risk, the types of investments included in the portfolio, etc

Without the existence of investment mandates, those interested in investing

in a specific fund would have to look at the current securities in the
portfolio and make assumptions about the fund. There are two significant
problems with this. First of all, this requires more investment knowledge
than the average investor may have. Secondly, without an investment
mandate, there is no guarantee that the portfolio will look similar to how it
does now in the future.
For example, a portfolio may currently have a relatively low level of risk and
volatility. Still, without an investment mandate, the investment manager may
decide that higher-risk investments are preferable and begin increasing the
portfolio’s risk profile, making it inappropriate for those currently invested. An
investment mandate helps to keep this from happening.

We can see how investment mandates help investors, but they also help
investment managers. An investment mandate clarifies the expectations of the
investment manager. It lets the investment manager know where they have
flexibility, where they must abide by specific parameters, the benchmark their
performance will be measured against, etc.
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.
Note: 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

Investment Mandate Example

To get a better understanding of what’s included investment mandate, look at the

table contents below.
Investment Mandates for Individuals vs. Funds

Investment mandates generally fall into two different scenarios:

 When an individual works with an investment manager
 There is a pooled investment vehicle

When the investment mandate is for an individual working with a financial

planner or investment manager, the individual may stipulate that the capital be
invested in a specific way. Often in these cases, the investment mandate has
less to do with particular investments and more to do with the individual’s
circumstances or priorities.
For example, suppose the individual plans to use a large percentage of
their current capital to purchase a home one year in the future. In that
case, the individual may have an investment mandate based on 
capital preservation (where the goal is to preserve capital instead of risk
the capital by attempting to grow it). In this case, the investment manager
would seek out investments with low levels of risk and volatility for the
client’s portfolio.

When investment mandates are employed for pooled investment vehicles,

such as mutual funds, ETFs, or endowments for universities, the mandate
applies to the entire pooled vehicle, not a specific individual’s needs. This
is beneficial for both the current investors and the manager as it helps
ensure that both parties agree on the funds will be managed.

Investment mandates also help prospective investors choose

between funds based on the investment mandate of that fund. In
the next section, we’ll see how you can use an investment mandate
to help you pick a fund.
Types of Investment Mandates

While there are many options for the specific instructions an investment
mandate may contain, there are a few types of mandates that are more
common than others. We’ll quickly take a look at some of the types of
investment mandates you’re most likely to see, all of which may be employed
by individual investors or funds.
 Small-Capitalization Stock
 A small-capitalization stock investment mandate requires that only firms that
fall below a certain market cap may be included. The definition for small-cap
stocks varies, so different funds may specify different market-caps as their
cut off.
 Global
 A global investment mandate requires stocks from both the home country
and abroad. These mandates may include parameters on the number of
international stocks that must be included or may have instructions about
the location, industry, sector, etc. of the included stocks.

 International
 An international investment mandate differs from a global investment
mandate. While global mandates include investments in the home
country and abroad, international mandates typically limit the portfolio to
securities based outside of the home country. Funds with an international
mandate may be a good option for those looking to diversify their
portfolio beyond their own country.

 Low-Turnover
 A low-turnover investment mandate restricts the amount of turnover in
the portfolio in a given year. Typically, the mandate instructs for a
maximum turnover rate of between three and five percent per year.
 Long-Term Growth
 A long-term growth investment mandate specifies that the long-term
growth of capital is to be prioritized over other potential objectives,
such as current income or minimizing the risk of volatility. A portfolio
with a long-term growth investment mandate is typically made up
mostly of stocks.

 Income
 An income investment mandate is on the opposite end of the spectrum
to long-term growth. While long-term growth may also be a goal, the
priority of a portfolio with an income investment mandate is to provide
passive income.
 Environmental, Social, and Governance (ESG)
 Once a more niche option, 
ESG investment mandates are growing in popularity, and the
expectation is that their popularity will only continue to grow.

 The goal of portfolios with an ESG investment mandate is to limit

investments to securities that are ethical, sustainable, and/or prioritize
social issues. There are many different types of ESG investment
mandates, and they often prioritize various issues.

 For example, the priority of one ESG fund may be investing in renewable
energy sources. In contrast, the focus of another may be only investing
in securities involved in furthering social justice.