Assets under management

Table of Contents

Assets under management
What are AUM?
Understanding AUM
Formula for AUM
Calculation of AUM
Examples of AUM
Frequently Asked Questions

Assets under management

A small number of organisations manage enormous quantities of wealth on behalf of their clients in the quick-moving and dynamic world of finance. These financial behemoths, which range from investment companies to hedge funds, are tasked with protecting and expanding their clients’ assets. The assets under management, or AUM, measure, a crucial indicator of an institution’s importance and financial success, is at the core of this trust.

What are AUM?

The total amount of investments and assets that a financial institution or investment business manages on behalf of its clients is referred to AUM. A wide variety of holdings, including stocks, bonds, mutual funds, real estate, cash, and other financial instruments, are included in these assets. AUM is a vital indicator of investment businesses’ size, performance, stability, and capacity to attract and retain clients. It has a significant impact on management fee revenue generation and significantly affects the financial picture.

Understanding AUM

An investment firm having a large AUM under management can increase its revenue and improve its standing in the market. With a greater AUM, companies can base their service costs on a portion of the overall assets handled. Greater AUM consequently translates to greater fees and possibly higher earnings. But as AUM increases, so does responsibility since the company must continue to take vigilant steps to protect and grow its clients’ investments.

The AUM indicator is vital for investors looking to select the best company for their financial objectives as well as for financial institutions. Although a company’s sizable AUM may indicate stability and dependability, it is important to consider other aspects, such as performance history, investing strategy, and risk management procedures.

Formula for AUM

The calculation method for assets under management is rather simple:

AUM = Σ Market value of all managed assets

The symbol Σ in this case, denotes the total value of all individual assets that the financial institution manages on behalf of its clients. To calculate the total AUM, the market value of each purchase is multiplied by the number of assets held in the portfolio.

Calculation of AUM

Let us consider a scenario to understand the calculation of AUM, where a fictitious investment company looks after three customer portfolios that contain the following assets and their associated market values:

Portfolio A: 1000 shares of Company X at US$50 per share

Portfolio B: 500 bonds of Company Y at US$1,000 per bond

Portfolio C: US$2 million in cash

For Portfolio A AUM for 1000 shares for US$50 each equals US$50,000

Portfolio B’s AUM is calculated as 500 bonds multiplied by US$1,000 for each bond, which is US$500,000.

Portfolio C’s AUM is US$2,000,000, according to the calculation.

AUM = Σ Market value of all managed assets

Total AUM = US$50,000 + US$500,000 + US$2,000,000 = US$2,550,000

In this case, the investment company has US$2,550,000 worth of assets under management.

Examples of AUM

Investment company Blackstone Group has over US$600 billion in AUM. The company draws institutional and private clients worldwide with its varied portfolio, including private equity, real estate, credit investments, and hedge funds.

Blackstone’s huge AUM reflects its status as a financial titan, relied upon by investors looking for competitive returns and knowledgeable direction in navigating the intricacies of the investment environment.

Frequently Asked Questions

How is AUM used as a tool by investment companies?

AUM is an important tool for investment firms in multiple contexts.

First, it calculates the entire worth of client assets committed to the organisation, demonstrating its size and market relevance.
A bigger AUM frequently indicates the company’s success and attracts more clients and investors.
Second, because management fees are often levied as a proportion of AUM, AUM impacts the firm’s revenue.
Furthermore, investment firms utilise AUM as a performance indicator, measuring growth over time and compared to competitors.
A higher AUM allows businesses to negotiate better rates with service suppliers, improving operational savings.

What does AUM tell potential investors?

AUM, or assets under management, is a significant indicator that tells potential investors about the size and scope of a fund or investment company. A greater AUM might indicate stability since it indicates that the fund has earned the trust of many investors. It tells the fund’s capacity to acquire considerable cash and implement effective investing ideas.

However, AUM does not ensure performance or appropriateness for a particular investor’s objectives. Before selecting, investors should analyse the fund’s investment strategy, track record, expense ratio, and compatibility with their personal risk tolerance and investing objectives.

What is the benefit of a fund with a large AUM?

A fund with large assets under AUM reaps the advantages of economies of scale. As the fund expands, the fixed expenses are spread out over a bigger base, lowering the expense ratio for investors.

Furthermore, a bigger AUM may give the fund management access to better investment options, enhanced liquidity, and more leverage when negotiating fees and expenditures with service providers. A big AUM may also attract more institutional and individual investors, increasing the fund’s credibility and contributing to further growth through further inflows.

What is the difference between NAV and AUM?

A mutual fund’s per-share value, or net asset value (NAV), represents the fund’s current value. The total value of all assets managed by a financial institution, including various funds and investment vehicles, is referred to as AUM, which reflects the firm’s position and size in the market.

Is a high AUM good or bad?

A financial institution’s ability to draw in and hold on to customer funds is demonstrated by a high AUM, typically viewed as a favourable sign. It denotes market assurance, the possibility for greater income from management fees, and the institution’s capacity to negotiate the challenging investment environment. However, it also entails the duty of careful asset management to provide clients with favourable returns.