Assets under management

Assets Under Management, or AUM, must be considered one of the most critical indicators regarding how financially fit or important a firm is in the market. Whether you are an accomplished individual investor or just exploring investment firms or funds, it is vital to understand AUM. 

Assets under management

When investing in a mutual fund, you must first comprehend a few ideas to make an informed choice. AUM, or assets under management, is one of them. AUM is a critical metric to consider when assessing a mutual fund. AUM is simply one factor considered when assessing a business or investment. It is frequently taken into account together with managerial experience and performance. But higher investment inflows and AUM comparisons are usually seen by investors as indicators of quality and management prowess. 

Assets Under Management, or AUM, refers to the aggregate market value of every financial asset managed by an investment firm or a fund on behalf of its customers. These can be stocks, bonds, real estate, cash, or any other form of financial instrument. AUM serves as a benchmark for assessing the scale and performance of a financial firm or fund since it gives an indication of the collective amount managed and the total wealth under control. 

For instance, if an investment firm has US$50,000 in client investments under management, this will be its AUM. When more join the firm or when investments become successful, the firm’s AUM will rise, proving that the firm is increasing and succeeding. 

What is AUM? 

AUM in its simplest form, refers to the entire market value of assets held by a financial institution or investment adviser, whether from a single customer or a number of them.  AUM comprises  funds that a manager has to use in making new investments and the returns a mutual fund has earned. 

 AUM measures both the size and performance of a mutual fund.  A rising AUM might be a sign of improved fund performance, the entrance of new investors with more money to invest, or both.  A declining AUM indicates the opposite: subpar performance or a big redemption that may or may not be related to the fund’s performance.     

Understanding AUM 

AUM is one indicator that investors look at when assessing a portfolio manager.  A higher AUM might be a sign of a manager who has shown their ability, among other factors, including experience, management performance, disciplinary history, and services supplied.  Financial organisations use the value of AUM to gauge market trends by comparing them to those of their rivals as well as to their own past performance. 

 The AUM helps investors to analyse a fund’s performance and assess its growth potential.  It also affects an investment manager’s fee structure, as fees are usually charged as a percentage of AUM. 

Securities and Exchange Commission (SEC) registration is required for investment advisers with more than US$25 million in AUM under their management.  Less experienced advisors are permitted to register with the state securities administration. 

Calculating 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. 

Calculating AUM is a crucial task for investment managers.  To calculate AUM, the investment manager needs to add the market value of all the assets in the fund.  

 A fund’s managed assets have variable values at all times.  It varies based on how many investors contribute capital and the fund’s profits.  The market value of investments that perform poorly, fund layoffs, and a decline in investor flows are all factors that affect AUM.  AUM may include money held by investment business executives or restricted to all investor cash invested in the firm’s products. 

 Accurate calculation of AUM is necessary for reporting to regulatory authorities and providing transparency to investors about the portfolio’s size and composition. 

AUM payment and fees 

For funds and investment businesses to register with the SEC, they must meet certain AUM standards.  To maintain the fairness and orderliness of the financial markets, the SEC is in charge of regulating them.  Depending on several variables, including the firm’s size and location, the SEC registration threshold might range from US$25 million to US$110 million in AUM. 

AUM could also have a significant role in determining how much to charge.  Many investment products have pre-set percentage-of-assets-under-management management fees.  Additionally, a lot of personal money managers and financial advisers bill their customers as a percentage of the overall assets they handle.  This ratio often declines as AUM rises, allowing these financial experts to draw high-net-worth investors. 

Importance of AUM

• Both investors and financial firms are highly interested in Assets Under Management. Indeed, AUM is one of the fastest ways an investor can assess the size of a fund or financial institution in terms of size and stability.  

• Firms with higher AUMs are more frequently perceived as secure and may even be able to offer more diversified investment choices and lower fees because scaling economies will help significantly. 
• A higher AUM thus brings higher revenue potential for financial firms as most firms charge management fees as a percent of the assets they manage. 

Example: If a company’s AUM is US$50,000, with an annual management fee of 1%, then earnings would be US$500 yearly. This means that with the increase in the AUM, the firm’s earnings increase to sustain further growth and investment. 

Different Types of Funds in AUM 

AUM will vary across different types of funds. Some of them are: 

1. Mutual Funds: Mutual fund AUM refers to the aggregate amount of value owned collectively by these funds on behalf of its investors. Growth in AUM reflects new investor inflows and good fund performance. 

1. Hedge Funds: Hedge funds are institutions that invest huge amounts of money from high-net-worth individuals and Institutional investors. Their AUM is highly responsive to market conditions and investor confidence. A hedge fund employs complex, aggressive strategies, often backed by extensive advanced mathematical modelling. 

1. Exchange-Traded Funds (ETFs): ETFs declare their AUM, which reflects the size of capital being invested in the fund. A higher AUM in an ETF usually signifies increasing investor interest or even confidence within the asset class or market the ETF tracks. 

These funds differ by strategy, risk level, and fee structure, with the AUM indicating their scale, stability, and attractiveness. 

Examples of AUM 

Let’s use the scenario of a mutual fund with a large cash position and a diverse portfolio of equities and bonds.  Assume the mutual fund’s portfolio comprises US$2 billion in cash, US$1 billion in equities, US$2.5 billion in government bonds, and US$1.5 billion in corporate bonds. 

The assets under management for the fund will be US47 billion in total. 

 Investors frequently consider a fund’s AUM since it measures the fund’s size when assessing it.  Investment items with high AUMs often have high market trading volumes, which makes them more liquid and enables investors to acquire and sell the fund easily. 

Frequently Asked Questions