Asset Owners and Delegated Managers

Abstract

Asset owners (principals) typically do not manage their own investments and leave this job to delegated managers (agents). What is best for the asset owner, however, is usually not best for the fund manager. Additional agency conflicts arise when the asset owner does not know the quality and cannot infer the actions of the agent. Principal-agent conflicts can be mitigated by appropriate governance structures and contracts. The benchmark choice is important because poorly designed benchmarks in delegated asset management problems cause agents to work against what the asset owner wishes to achieve. In cases where there are many principals, effective boards can advocate for the principals’ interests, and boards should build processes for investment decisions rather than actively making direct investment decisions.

Keywords: Principal-agent, Boards, Delegated portfolio management, Benchmark, Optimal Contract

JEL Classification: D81, D82, G11, G12, G20, G34, M52