A management company, in the fund industry, is the legal entity responsible for managing one or more investment funds. It decides or oversees how the fund's money is invested, manages risk, arranges administration and distribution, and answers to regulators and investors for the fund's operation. In European practice it is often shortened to "ManCo". The term is used here in that financial sense; in other fields it can refer to a firm that runs property, hotels or another business on an owner's behalf.
The role exists because an investment fund is usually a passive pool of assets with no staff of its own. A contractual fund or unit trust has no legal personality and can act only through its manager. A fund set up as a company has a board, but in most cases it appoints an external management company; some are self-managed. The management company is distinct from the depositary or custodian, which holds the assets and oversees the manager, and the two must be independent of each other.
Functions
European fund law lists the functions that make up collective portfolio management.
- Investment management. Selecting and trading the fund's assets within its stated objectives and restrictions.
- Risk management. Measuring and limiting market, credit, liquidity and operational risks, under a function separate from portfolio management.
- Administration. Fund accounting, valuation and pricing, the investor register, issue and redemption of units, regulatory reporting and record keeping, as described under fund administration.
- Marketing. Distribution of the fund's units, directly or through intermediaries.
The management company also sets and applies policies on valuation, liquidity tools such as swing pricing, voting, best execution, remuneration and the handling of conflicts, and it prepares the prospectus and investor disclosure documents. Its income is the management fee charged to the fund and, where applicable, a performance fee.
Authorisation and requirements in Europe
A firm managing UCITS funds must be authorised as a UCITS management company, and a firm managing alternative funds above certain size thresholds must be authorised as an alternative investment fund manager; many hold both licences. Authorisation is given by the regulator of the firm's home state and allows it to manage and market funds across the European Union under a passport.
Conditions include initial capital of at least 125,000 euros, with additional own funds required as assets under management grow, subject to a cap, and a minimum related to the firm's fixed overheads. The persons who direct the business must pass a fit and proper assessment, and at least two must conduct it. The firm must have sound administrative and accounting procedures, internal control, compliance and audit functions, and rules on personal dealing. It must act honestly and fairly in the best interests of the funds and their investors, and maintain a policy and a conflicts of interest register. Remuneration of senior staff and risk takers must be consistent with sound risk management.
Delegation and substance
A management company may delegate functions to third parties, and most do. Portfolio management is frequently delegated to an asset manager in another country, administration to a fund administrator, and transfer agency to a specialist. Delegation must be justified, notified to the regulator and monitored, and it does not reduce the management company's liability. The firm may not delegate so much that it becomes a letter-box entity, and regulators, particularly in Luxembourg and Ireland where many funds are domiciled, set expectations for local staff, senior managers and decision-making. These rules have been tightened in recent revisions to European fund legislation.
The model supports a business of third-party management companies, which provide the regulated platform, governance and oversight for funds whose investment decisions are made by an outside sponsor.
Use of the term elsewhere
In the United States the equivalent firm is an investment adviser, registered with the securities regulator and engaged by the fund under an advisory contract approved by the fund's board. The words "management company" have a different statutory meaning there: under the Investment Company Act of 1940, a management company is a type of investment company, covering open-end and closed-end funds, as opposed to unit investment trusts.
In private equity and venture capital, the management company is the firm that employs the investment team, owns the brand and receives the management fees from each fund it raises. It is separate from the general partner entity of each fund, which makes the general partner commitment and receives carried interest. Ownership of the management company, and the sale of stakes in it to outside investors, has become a market of its own.
Responsibilities and liability
The management company owes duties to the fund and its investors comparable to those of a fiduciary. It is responsible for errors in valuation and pricing, for breaches of investment restrictions and for failures by its delegates, and must compensate the fund where investors suffer loss as a result. Supervisors expect it to oversee the net asset value calculation even when the work is outsourced, to manage liquidity so that redemptions can be met, and to assess whether the costs charged to investors are justified. Regulatory reviews have criticised some firms for weak oversight of delegates and for insufficient resources in relation to the number of funds managed.