Assets under management or AUM are the funds managed by an individual or an institute. These are the total assets managed by the fund managers for their investors.
AUM is the indicator of the size and performance of a fund like a mutual fund or hedge fund. Investors and fund managers use this metric as a key performance indicator in several ways.
Let us discuss what asset under management mean, how it is calculated, and what is its importance.
Asset Under Management (AUM) – Definition
Asset under management (AUM) refers to the total market value of assets managed by an individual or an institute.
It is commonly referred to as the investments and financial securities managed by fund managers and financial institutions like banks, brokerage firms, mutual funds, and hedge funds.
By definition, AUM should include all types of assets held by an individual or a business entity. However, some experts exclude cash and cash equivalents from the calculations of AUM and only include assets segregated for investments.
AUM may also refer to the assets managed by a business entity. However, it is an uncommon way of discussing AUM as assets held by businesses are discussed in terms of net asset values or net assets.
Understanding Asset Under Management
In simple terms, AUM refers to the total assets held and managed for investments by an individual or a financial institute.
It generally refers to the sum of market values of financial securities in a fund or a portfolio of investments managed by fund managers.
The size and market value of AUM by a financial institution are considered an indicator of success and expertise generally. However, managing larger funds in terms of AUM does not necessarily mean higher returns.
Sometimes, fund managers may state individual AUM. This refers to the assets under management for a specific client.
The size and growth of AUM are linked with other performance measurement indicators. For instance, if the return on assets is constant for a large AUM fund or increases, it is considered a sign of success for the fund manager.
Similarly, the larger size of AUM held and managed by the fund manager is also a symbol of prestige and an indicator of capabilities in the asset management industry.
How to Calculate the AUM Value?
Most fund managers look for diversification when allocating the available funds for investment. Therefore, the fund will have different types of financial securities.
The calculation of the asset under management begins with the calculation of the market values of these securities.
For example, a mutual fund has invested in stocks, municipality bonds, and corporate bonds, and keeps a proportion of total assets in the form of cash.
The mutual fund will first determine the market values of these financial securities. Some experts include the value of cash and others do not consider it under the AUM calculations.
Then, the total value of the AUM will be the sum of these market values. Since the market values of these securities change frequently, the total market value of the AUM of a fund will also change frequently.
Real-World Examples of AUM
Let us consider a few real-world examples of the largest funds around the world in terms of assets under management.
According to a Morningstar research report, these are the top five fund families in the world in terms of AUM.
- The Vanguard Group
- Assets under management = $ 6.151 trillion
- Number of funds managed = 184
- Blackrock or iShares
- Assets under management = $ 2.342 trillion
- Number of funds managed = 525
- Assets under management = $ 2.167 trillion
- Number of funds managed = 483
- American Funds
- Assets under management = $ 2.037 trillion
- Number of funds managed = 75
- SPIDER – SPDR
- Assets under management = $ 870 billion
- Number of funds managed = 181
Here are a few examples of top mutual funds in terms of assets under management according to a ranking report compiled by SWFI.
- Bridgewater Associates, LP: AUM Value = $154,000,000,000.
- Alphadyne Asset Management: AUM Value = $128,100,000,000.
- Renaissance Technologies LLC: AUM Value = $119,659,313,126
- ExodusPoint Capital Management: AUM Value = $110,000,000,000.
- Tiger Global Management LLC: AUM Value = $79,100,000,000.
AUM and Fund Performance
Fund managers use the size and value of AUM for different purposes including as a performance indicator.
The large size of assets under management is difficult to manage in several ways. Fund managers require investment pools to generate sufficient returns on investments.
With large funds, it is difficult to find continuously positive NPV investment opportunities.
Secondly, the diversification of a large AUM fund is difficult. When fund managers look to diversify, their ROA drops usually. So, balancing between the ROA targets and reducing risks is difficult.
Also, allocating the large inflows of investments into the fund in a timely manner is challenging. Fund managers cannot set the available funds aside and lay them idle. It would come at an opportunity cost for the whole fund.
The value of AUM is also a key performance indicator for the financial institution holding the fund as well. The large size of AUM is considered a sign of pride and prestige for the fund management institute as well as the fund managers.
Importance of AUM
First of all, corporate investors will look at the size and market value of a fund in terms of AUM. They’ll prefer a large and successful fund as compared to a young and inexperienced fund anyway.
So, the calculation and value of a fund are good tools to attract large corporate investors. Hence, it works as a marketing tool for fund management companies.
In most cases, the market value of the AUM will determine the regulatory requirements for the fund management company. The regulatory requirements and additional compliance restrictions may be higher for a larger fund.
Fund managers also charge significantly high fund management fees. As these funds distribute almost all of the income to the portfolio, their income comes through the commission or management fee.
Therefore, the market value of AUM is considered a tool to calculate the management fee of a fund manager as well.
In short, the market value of the AUM of a fund can be taken as a starting point to compare its performance against other funds.
However, AUM is not the only performance indicator that investors should look for. It should be considered in conjunction with other KPIs like ROA, ROI, Dividend Yield, and so on depending on the investment goals of the investor.
How Does the AUM Value Change?
Several factors affect the market value of AUM to change. Investors keep a keen eye on the changing values as it affects their investment returns.
Inflows and Outflows of the Fund
Investors can buy more or sell their shares in the fund at any time. Also, the fund may acquire new assets or dispose of existing ones.
Thus, the inflows and outflows of a fund are the largest contributors to the changing values of the AUM.
Market Values of the Securities
Another significant factor is the total market value of the securities held by the fund. Since these financial securities change in terms of market value due to several factors, it will result in a change in the value of AUM.
Similarly, investing or disposing of these financial securities will change the value as well.
Mutual funds usually distribute dividends to their investors. In some cases, the investors would reinvest these dividends for capital gains.
Thus, the dividend decision will change the total value of the AUM. If the dividends are reinvested, they will increase, and if they are distributed the AUM will decrease.
AUM and Volatility
The factors mentioned above not only change the market value of AUM, but they also affect the volatility of the fund directly too.
For example, if a fund sees a large inflow and outflow and consistently, it will bear more volatility than a stable fund with minimum movements.
Similarly, a fund having volatile securities will see higher volatility as compared to a fund with investments in stable financial instruments.
Fund managers will often look to control the volatility by imposing restrictions on inflows and outflows through the lock-up periods.
A lock-up period will restrict any inflows and outflows and would result in higher stability of the fund.
Some funds would also restrict buying or selling of the investments to their investors. It will restrict the trades and keep the volatility under control by bringing more stability.
A volatile fund will cause serious issues for the fund managers as they wouldn’t be able to control the size of the fund, pursue investment goals, and generate sufficient returns for their investors.