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Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company. When calculating AUM, some financial institutions include bank deposits, mutual funds, and cash, while others limit it to funds under discretionary management from individual investors.
AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, a brokerage company, or an individual registered as an investment advisor or portfolio manager. When an investor has $50,000 in a mutual fund, those funds are part of the total AUM of the pool of funds. The fund manager can buy and sell shares according to the investment objective using all invested funds without obtaining special permissions.
AUM includes the capital the manager can use to make transactions for one or all clients. An investor may need a minimum amount of personal AUM to qualify for a type of investment, such as a hedge fund, to ensure the client can withstand adverse markets. An investor’s AUM may coincide with their net worth and may determine the type of services received from a financial advisor or brokerage company.
Investors often consider higher investment inflows and higher AUM of a financial institution as positive indicators of quality and management experience.
Calculating assets under management varies among companies and depends on the flow of investor money in and out of a fund. Asset performance, capital appreciation, and reinvested dividends increase the AUM of a fund. Assets under management also increase when new customers and their assets are acquired. A decrease in AUM occurs following losses in the market value or performance of assets, fund closures, and decreased investor in-flows.
Calculating AUM involves aggregating the total market value of all assets that an investment manager oversees on behalf of clients. This includes a diverse range of investment vehicles such as stocks, bonds, mutual funds, ETFs, cash equivalents, and other securities.
The process entails identifying and valuing each individual asset held within client portfolios, taking into account factors such as current market prices, fair values, and any applicable currency conversions. For this reason, AUM likely fluctuates constantly for most calculations. Once the market values of all assets are determined, they are all added together to get AUM.
The U.S. Securities and Exchange Commission (SEC) requires firms to register with the SEC with AUM ranging between $25 million to $110 million, depending on several factors, including the size and location of the firm. The SEC regulates the financial markets to ensure that it functions properly.
It's important to note that state securities regulators have authority over advisers handling up to $100 million. Advisers with assets under management below $100 million are required to register with the securities regulator of the state where their principal place of business is located.
If a state-registered adviser's AUM reach the $100 million threshold, they may choose to register with the SEC. However, once their AUM surpass $110 million, registration with the SEC is typically mandatory.
AUM can be a consideration when calculating fees. Many investment products charge management fees as a fixed percentage of AUM. Financial advisors and personal money managers charge clients a fee as a percentage of personal assets under management.
The relationship between AUM and fees is not necessarily straightforward. For example, you may assume that as AUM increases, so do the fees earned by investment managers. This would be because management fees are typically calculated as a percentage of AUM, meaning that higher AUM result in higher fee income for the manager.
However, it is essential to recognize that fee structures can vary widely across different investment products and client segments. For example, actively managed funds may charge higher fees than passively managed funds due to the active management and research involved.
Another exception to this is for larger, institutional clients. Institutional clients may negotiate lower fee rates than retail clients due to their larger investment sizes and bargaining power. Management firms may also proactively lower their fees to entice large investors. Therefore, higher AUM doesn't always mean higher fees, at least when it comes to a fixed percentage.
One of the ultimate goals of investment firms is to increase its AUM. This means that the company is holding a higher amount of dollars to invest which creates greater leverage for future potential growth.
Though not financial by any means, one key strategy is effective marketing tactics aimed at raising awareness of the investment manager's capabilities, expertise, and track record. Part of this strategy may be to incorporate information on the current AUM, if it's worth boasting about.
Though also not necessarily tied to quantitative financial analysis, client acquisition strategies also play a role in AUM growth. Investment firms can prioritize identifying and acquiring new clients who align with the investment manager's target market and investment objectives to grow AUM.
Last, product development and differentiation is another important aspect of AUM growth strategies. This involves developing innovative investment products and solutions that address evolving market trends, investor preferences, and regulatory requirements. For instance, State Street (which we'll look at in the example below) notes "State Street Alpha" in its 2023 annual report, an architecture platform used to interpret data at a large scale. New products like this can help a firm bring in new capital from new or existing customers.
Higher AUM isn't always better. High AUM does not guarantee financial success, and lower AUM opportunities may have better risk/reward ratios as less investors if less investors are participating in the pportunity.
Investor psychology plays a role in influencing fluctuations AUM. During periods of optimism and bullish sentiment, investors may allocate more capital to investment vehicles, leading to increases in AUM for investment managers. Conversely, during times of pessimism and bearish sentiment, investors may withdraw funds or reallocate assets to safe havens, resulting in declines in AUM.
Behavioral biases such as herd behavior can play a factor as well. For instance, beginning investors may not know where to start; therefore, they may think it's safest to simply invest in ETFs or with global investment companies that have the highest AUM. Though there is at least some legitimacy to this mindset, this also plays into a dangerous cycle where investors simply follow each other not on the basis of fundamental analysis but simply because it's what others are doing.
The SPDR S&P 500 ETF (SPY) is an exchange-traded fund. An ETF is a fund that contains several stocks or securities that match or mirror an index, such as the S&P 500. As of May 31, 2024, SPY's NAV was $522.58 per share, and total assets under management was $526.22 billion.
Meanwhile, the management firm State Street Global Advisors manages other funds as well. Therefore, at the end of 2023, the global investment firm had AUM of $4.1 trillion, the fourth highest of all investment firms.
Investment companies use assets under management as a marketing tool to attract new investors. AUM helps investors determine the size of a company's operations relative to its competitors.
When evaluating a specific fund, investors often look at its AUM as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more liquid, meaning investors can buy and sell the fund easily.
Funds with large AUMs have sufficient holdings to meet any redemption pressure. If a few large investors leave the fund, it would not likely impact it.
Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM can reveal the management performance and experience when investors evaluate a company or investment. The SEC regulates firms with large AUMs to protect investors.
