What is Investment Management Agreement (IMA)?

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An Investment Management Agreement (IMA) is an agreement between an investor and fund manager, where the fund manager agreed to manage the investment for the investor according to the objective and manner stipulate in the agreement. This agreement is formulate between an investor and the fund manager after rounds of negotiation with the help of legal adviser. 

The main component of IMA includes the investment objective/target, investment restriction, management fees for the fund manager, custody of the investment, valuation and reporting requirement. Like any other business contract it will also includes effective date of contract, duration of contract and condition of termination.

Listed below is some of the key component in the IMA:

Investment Objective / Target

Under investment objective, the investor will stipulate what is the investment objective and the target return. This is the most important component for the fund managers. For example, an investor can demand the fund manager to align the investment portfolio with an established benchmark; while allowing the fund manager a 20% deviation from the benchmark but the fund manager must have a return target of 2% above the benchmark. Therefore, if a benchmark has a 7% return, then the return target should be 9%. There are many types of investment objectives and target returns.

Investment Restriction

This component is very important not only to the fund manager but it is also important to all the operational staff including the traders. Any violation of the restriction may carry a heavy penalty. While the compliance officer will ensure the enforcement of investment restriction; it is usually too late because the trade has been done. The onus is mainly on the fund manager, fund management assistance and the trader to prevent from violating the restriction. Some companies even hire staff just to do pre-trade compliance. Listed below is some examples:

• No investment in xxx country
• No investment in tobacco and liquor stock
• Investment in xxx stock may not exceed x% in the portfolio
• Cash must be maintained between 2% to 5% of the portfolio

Management Fee

This is the income of the fund management firm. Besides the executives, the accounting staff must be aware of the fee so that fees can be accrued and deducted from the portfolio accordingly.

Custody of Investment

If you manage money for a pension fund, usually they will appoint a custodian bank to hold the investment portfolio including the bonds, stock certificates and cash. The custodian bank will also be representing the pension fund in annual shareholder meetings. Any stock splits and rights issue will also be managed by the custodian bank. A lot of central bank and monetary authority encourage such practice because it provides check and balance, and potentially prevent rouge fund managers from misusing the client's asset. Custodian bank has specific instruction to notify the investor if there is large movement of cash or stocks. In addition, the pension fund may ask the custodian bank to provide fund accounting and valuation services.

Valuation and Reporting Requirement

Valuation requirement stipulate how the investment portfolio be valued such as  the date of valuation, the exchange rate and who to provide the valuation. More sophisticated clients will require the valuation be done by the custodian and they  may request additional valuation report from the fund manager for comparison. The client may also stipulate the reporting deadline.

There are many components in an IMA, the items mentioned above are just some key components that are common. Not every IMA is the same and the investor may include anything under the sun as long as the fund manager agrees.

Usually the negotiation of IMA happens between the investor and some key executives of fund management firm. Those key executives includes the CEO, marketing manager and fund manager. Usually the operational staff is out of the loop until the agreement is signed. This presents some problem when the marketing managers promise everything the investor requires without considering whether if the operation staff could deliver those requirement. If the COO is not involve in the negotiation of IMA, it would be advisable to allows the COO to go through the final draft of the IMA to determine if his/her operation staff could deliver the requirement before the CEO sign the IMA.

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