A finished FIN-655 Topic 1 mandate design memo example, pricing what a near-index active manager really charges, setting a tracking error floor and fixing review rules before hiring. Searches like "fin 655 topic 1 assignment example", "fin655 topic 1 sample" and "fin-655 topic 1 example" land here.
What a finished FIN-655 Topic 1 mandate design memo looks like
The finished memo opens with the duty rather than the portfolio: the committee invests for plan participants, and every term it signs must be defensible to them. An illustrative fee of 0.55 percent against 0.03 for an index sleeve costs about 780,000 a year on 150 million. The manager's composite shows tracking error near 1.4 percent and an active share around 30 percent, so roughly 70 percent of the portfolio is the index. Charging 0.55 on the whole means paying about 1.76 percent on the 30 percent that differs, once the index portion is credited at 0.03. William Sharpe's arithmetic of active management frames the stakes: before costs, active dollars in aggregate earn the market return, so after costs they must trail it. The memo sets terms that make the active bet visible and priced.
How a FIN-655 Topic 1 example is structured
Duty, delegation, price, terms and review are the memo's five parts. An opening states whose money the sleeve is, what the plan's governing documents require of the committee in general terms, and which decisions the committee keeps rather than delegates. The delegation section lists where the manager's interests part from the participants': a fee paid on assets rewards keeping the account more than beating the benchmark, and career risk favors staying close to the index. A pricing section converts the proposed fee into a cost per unit of active exposure. The terms section names the benchmark, a tracking error range of 2 to 5 percent, permitted instruments, a position limit and the holdings report due each quarter. Index futures are allowed only to keep cash invested. The review section sets a five-year evaluation net of fees and names what would end the mandate sooner.
Whose money, and who decides
The sleeve belongs to participants who never chose the manager, so the memo lists which decisions the committee keeps and which it hands over.
A fee read per unit of activity
With about 70 percent of the portfolio matching the index, a 0.55 percent fee works out near 1.76 percent on the part that actually differs.
Incentives that part from the participants
Pay tied to assets rewards retaining the account, and career risk rewards hugging the index, so neither pushes the manager toward the active return the fee is meant to buy.
A tracking error floor as well as ceiling
Requiring at least 2 percent tracking error stops the committee paying active fees for an index fund, while the 5 percent ceiling bounds the bet.
Review rules written before the hire
Evaluation runs over five years net of fees, while a departed portfolio manager, style drift or a breached limit reopens the mandate at once.
Where marks go in FIN-655 Topic 1
Memos that set the manager's record beside the index and recommend the hire take the heaviest loss, because the question here is what changes once the committee answers to someone else. Papers that quote the fee without relating it to how much of the portfolio is active miss that a near-index manager is expensive in the way participants cannot see. Mandates with a tracking error ceiling and no floor permit the closet indexing the fee should rule out. Leaving the review horizon unstated invites the committee to fire on one bad year and hire on one good one. Citing Sharpe's arithmetic as proof that no active manager can add value overstates it, because the argument concerns the average dollar. A memo that never names which decisions the committee keeps has delegated its own duty along with the portfolio.
Get a FIN-655 Topic 1 example written to your instructions
Send the FIN-655 Topic 1 instructions and the rubric from your classroom, with the plan or mandate case your section assigns. We write a custom example to them, with the committee's duty stated, the fee priced against the portfolio's active share, tracking error bounded from both sides and review rules fixed before the hire, in 24 to 48 hours. The first one is free.
FIN-655 Topic 1 questions, answered
What is active share, and why does the memo use it?
Active share measures how much of a portfolio's holdings differ from its benchmark's, from zero for an index fund to 100 percent for a portfolio sharing nothing with it. The measure is associated with Martijn Cremers and Antti Petajisto. The memo uses it to show what the fee buys: a manager whose holdings mostly match the index is charging an active price for a largely passive portfolio.
What did Sharpe's arithmetic of active management show?
That before costs, the return on the average actively managed dollar must equal the return on the average passively managed dollar, because together they hold the market. After costs, the average active dollar must therefore earn less. The argument says nothing about any single manager, only about active managers as a group, which is why the memo uses it to set the burden of proof rather than to settle the hire.
Could the memo serve as a real plan's manager mandate?
No. The plan, the sleeve, the fee, the manager's statistics and the tracking error range were set for a FIN-655 exercise so that the cost of delegation shows clearly. A real mandate depends on the plan's governing documents, the law that applies to it, counsel's review and terms negotiated with an actual manager. It shows how FIN-655 expects delegation argued, and it advises no real committee.