Assets Under Management (AUM)

What is Assets Under Management (AUM)?

Assets Under Management (AUM) refers to the total market value of investments managed by an asset manager, hedge fund, financial institution, or portfolio manager on behalf of clients. Sometimes also referred to as “Funds Under Management”, the AUM is a key indicator that investment managers, research analysts, consultants and other investment roles pay attention to. AUM is usually part of the analysis of investment products, such as mutual funds, and can indicate the level of the overall business risk for the provider/manager (lower AUM could mean less profits and therefore higher business risk).

Why is AUM Important?

Depending on the type of the business and its strategic development plans, investment firms can operate across various markets and asset classes such as equities, fixed income, money markets, real estate etc. For them, the total size of the assets they manage is a key performance indicator since a larger asset pool would generally lead to higher revenues for the company. Senior executives closely monitor the AUM of the firm and compare it against previous periods, industry peers and watch for any trends in both individual business areas and the company as a whole.

Below is an example of AUM showing the breakdown by asset class of BlackRock.

Other areas that management would usually look at are how their AUM is developing in terms of geographical regions (i.e. where their investors are based) as well as the type of investor. Below is a real life example from T Rowe Price.

AUM is also important from an individual fund perspective. In mutual funds for example, investors pay attention to what the size of the fund is and preference would normally go for strategies with larger AUM. This is because larger size indicates higher trading volumes and better liquidity allowing investors to purchase or redeem shares in the fund more easily. However, there are caveats with that – large AUM on its own would mean nothing if the client base is not diverse and where it is dependent on a few large clients that may trigger liquidity issues should they decide to sell. In addition, funds are monitored for capacity and should they reach the pre-determined size (above which the fund may experience issues investing new inflows) it gets closed for new investors.

How is AUM Calculated?

AUM follows a straightforward calculation where all of the funds that a firm manages, across asset classes are combined. Below is an example from the reports of Janus Henderson, a British-American asset manager headquartered in London.

AUM is influenced by a couple of factors:

1. Asset flows – this is the inflows and outflows that the investment funds of the company experience over a specific period. For example, some investors decide to reduce their exposure to European equities as a result of their revised outlook for the asset class. Consequently, they trim their stake in the XYZ European Equities fund. This will reflect the on the firm’s overall AUM. Below is an example.

2. AUM is influenced by a couple of factors – as the value of assets is dynamic and changes over time that also impacts on the AUM of the firm. For example, if an Emerging Markets fund is performing well and delivers positive returns, the overall AUM will benefit. However, it is important that the performances of all of the firm’s funds are taken into account. Although not directly related, good performance also tends to attract more funds from investors, where those that perform poorly could further lose assets in the form of client redemptions. Below is an example of how is total investment performance reported in terms of asset classes – all of the firm’s funds in the asset class and what percentage of them delivered excess return against their target benchmark.

Assets Under Management (AUM) vs. Net Asset Value (NAV)

While AUM relates to the total market value of all the assets managed under a fund or a firm, the Net Assets Value (NAV) is a measure of the per-share value of a fund. It is calculated by subtracting a fund’s liabilities from its total assets and then dividing by the number of outstanding shares. Below is the calculation formula.

AUM is typically used in assessing fund size, asset growth and trends (and in some cases management fees), where NAV is used to assess fund performance and determine the price per unit before buying or selling shares in a fund.

AUM and Fees

AUM and fees are directly related as most of the fund management companies structure their management charges around the size of the assets in the fund. A typical example is where management fees are fixed percentage of the fund’s AUM. Nevertheless, this relationship is not always as straightforward as there could be different tier structures or early-stage advantages. In order to attract capital, a newly launched fund could offer an “early bird” fee until it reaches a certain AUM, after which the fees would increase. Also, institutional investors are almost always able to negotiate lower fee rates than retail investors due to their larger investment size and bargaining power.

Conclusion

To sum up, Assets Under Management (AUM) is an important metric that reveals the total market value of all assets that a firm manages. It fluctuates with fund and market performance and asset flows as clients invest or disinvest from a fund. Many firms charge a percentage-based management fee and higher AUM would generally lead to higher revenues. While Assets Under Management is often referred to as a measure of success, it can also be deceptive for some firms since larger portfolio sizes would not necessarily deliver better returns.

Additional Resources

Management Fees

Good Performance

Mutual Funds