Assets Under Management (AUM)
Assets Under Management (AUM) refers to the market value of the capital contributed to a fund, from which an institutional firm invests on behalf of its clients, i.e. limited partners (LPs).
What Does AUM Stand For?
AUM stands for “Assets Under Management” and refers to the amount of capital managed by an investment firm on behalf of its clients, i.e. limited partners (LPs).
If applicable to the scenario, the limited partners (LPs) of a fund are the investors that collectively contribute capital to the fund, which is managed and deployed by the general partners (GPs) to generate a return.
Common examples of investment firms in the financial services industry where the AUM metric pertains include the following types:
- Private Equity (LBO)
How to Analyze AUM by Industry?
The frequency at which the assets under management (AUM) change in industry-specific. Likewise, the method to calculate the metric is also distinct to each industry.
- Hedge Fund → A hedge fund’s AUM can move up or down based on the performance of its portfolio returns, i.e. the market value of the securities owned changes.
- Mutual Fund → A mutual fund’s AUM can be impacted by the inflows / (outflows) of capital in the fund, such as if an investor decides to provide more capital or remove some of their capital (or if the mutual fund issues dividends).
- Private Equity → A private equity firm’s AUM tends to remain more “fixed”, as capital raising occurs periodically with a set dollar amount raised. The actual AUM is typically unknown, as the actual market value of the investment is unknown until the date of exit (i.e. when the investment is sold via a sale to a strategic, a secondary buyout, or an IPO), contrary to the public equities market where securities trade constantly. In addition, there are lock-up periods in the agreements that can last long periods, where the limited partners (LPs) are prohibited from withdrawing funds.
AUM in Private Equity Industry: Impact on LBO Fund Returns
The greater the assets under management (AUM), the more difficult it becomes for a private equity firm, i.e. financial sponsor, to achieve outsized returns because the number of potential investment opportunities declines and the capital at risk is greater.
Therefore, most if not all large institutional asset management firms are “multi-strat”, a catch-all term referring to firms that utilize diversified investment strategies, most often in separate investment vehicles.
Given the sheer magnitude of the capital managed, these institutional firms must become more risk-averse over time and diversify into various asset classes. Considering the wide range of strategies employed for diversification and risk management, the multi-strat approach offers more stability in returns in exchange for less risk and more downside protection, as each different fund strategy essentially functions as a hedge against all other funds.
For instance, a multi-strat firm can invest in public equities, bonds, private equity, and real estate to allocate the risk across different asset classes and overall de-risk its portfolio holdings.
Considering the fund’s AUM, capital preservation frequently takes priority over achieving outsized returns – albeit, certain funds might take a more aggressive approach to achieving higher returns, which is offset by the other strategies.
On the flip side, certain firms intentionally place a “cap” on the total amount of capital raised per fund to prevent their returns profile from deteriorating.
For example, it would be unusual for a lower middle market (LMM) private equity firm to compete with a mega-fund to acquire an LBO target valued around $200 million, as that range of valuation (and potential returns) is insufficient to interest larger firms.
In fact, even if PE firms in the lower middle market (LMM) space could raise more capital, their priority is typically achieving high returns for their LPs rather than maximizing their fund size, which coincides with a strategically determined cap on the amount to raise, as well as charging lower management fees (%).
AUM in Hedge Fund Industry: Impact on Portfolio Returns
Likewise, the top institutional hedge funds that manage billions in total capital, such as Point72, will also not invest in small-cap stocks, despite the fact that there are more opportunities for arbitrage and mispricing in the market.
The abundance of opportunities to capitalize on is due to reduced market liquidity (i.e. trading volume) and less coverage from equity research analysts and the press (e.g. media).
To reiterate from earlier, achieving excess returns becomes increasingly challenging as the assets under management (AUM) of a firm increase.
One reason is that it becomes near impossible for the hedge fund — an influential “market mover” here — to sell its stake (and realize its gains) without the stock price of the small-cap company declining, which effectively reduces its returns.
Each move by hedge funds is closely followed by the market, and the sheer dollar amount of their investments alone can cause the stock price of a small-cap company to move up or down.
If a large institutional hedge fund sells its shares, other investors in the market assume the firm – considering it has more connections, resources, and information – is selling its stake for a rational reason, possibly resulting in less buying interest from the broader market.
- Less Order Volume + Increased Selling → Lower Share Price
- High Order Volume + Decreased Selling → Higher Share Price
Therefore, the largest hedge funds in terms of AUM are limited to investing in only large-cap stocks. And since equity research analysts widely follow large-cap stocks and retail investors alike, those stocks tend to be more efficiently priced.
Largest Hedge Funds by AUM (2023) – Excel Template
Interested in accessing our comprehensive database of 400 hedge funds and investment firms in the public equities market?
Fill out the form below to download the Excel spreadsheet at no cost.
BlackRock Assets Under Management: Investment Firm Example (2022)
BlackRock (NYSE: BLK) is a global, multi-strategy investment firm and one of the largest global asset managers, with over $10 trillion in assets under management (AUM).
The screenshot below shows BlackRock’s AUM as of June 2022 segmented on the basis of:
- Client Type
- Investment Style
- Product Type
BlackRock Q2 2022 Earnings Release (Source: BlackRock)
AUM vs. NAV: What is the Difference?
A common misconception is that assets under management (AUM) and net asset value (NAV) are identical.
- Net Asset Value (NAV) → The NAV represents the total value of the asset’s managed by a fund after deducting fund liabilities. Further, the net asset value (NAV) is often expressed on a per-share basis, reflecting how the use case of the metric is more related to mutual funds and exchange traded funds (ETFs).
- Assets Under Management (AUM) → Unlike the net asset value (NAV), the AUM cannot be expressed on a per-share basis, at the risk of stating the obvious. Hypothetically, even if the AUM metric could somehow be standardized on a per-share basis, it would still be impractical given the returns distribution (i.e. J-Curve), among other factors.
To summarize, the assets under management (AUM) is the total value of assets managed by a firm — of which a significant portion could be sitting on the sidelines — as opposed to a mutual fund or ETF like the net asset value (NAV).
Learn Buy-Side (Hedge Fund) Modeling
Led by a former hedge fund PM (Maverick, Citadel, DE Shaw, Schonfeld), this program begins where financial modeling training ends — with a deep-dive into how buy-side analysts build financial models to make key investment decisions.
Assets Under Management (AUM)
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
What is Assets Under Management (AUM)?
Assets under management (AUM), also called funds under management, is the total market value of the securities a financial institution (such as a bank, mutual fund, or hedge fund) owns or manages on behalf of its clients.
Example of AUM for a Mutual Fund
Let’s take the example of a mutual fund with a diversified portfolio of stocks and bonds and a significant cash position. Let’s suppose that the mutual fund’s portfolio consists of $1.5B in stocks, $2B in government bonds, $1.5B in corporate bonds, and $1B in cash.
The total value of the fund’s assets under management will be $6B.
Why Assets Under Management are Calculated
The total value of AUM is a measure of the size of a financial institution and a key performance indicator of success, as a larger AUM generally translates into larger revenue in the form of management fees. That’s why financial institutions look at the value of AUM and compare it to competitors and to their own history to assess business trends.
Moreover, in some jurisdictions, the value of assets under management may determine whether an institution must comply with specific regulations.
The way institutions or investors calculate assets under management can differ slightly. Some banks may include deposits and cash, mutual funds, and their calculations. Other institutions consider only the funds under discretionary management, which the institution can use to trade on behalf of the clients.
How AUM Changes Over Time
The amount of assets under management changes due to:
- Inflows and outflows of funds. For example, investors in a mutual fund may increase or reduce the size of their investment by buying additional shares in the fund or by selling the ones they already own, which will change the total size of the fund’s AUM.
- The value of the securities in which AUM is invested. For example, a mutual fund will experience an increase (decrease) in AUM when the market value of its securities increases (declines).
- The number of dividends paid by the companies in the institution’s portfolio, if reinvested and not distributed.
As a result of the factors above, the value of the assets under management changes constantly.
The factors mentioned above also determine how fast AUM changes. For example, other conditions held equal are:
- A fund with frequent inflows and outflows will demonstrate higher volatility in its AUM than a fund with a very committed and stable investors’ base.
- A fund that invests in volatile securities will experience wider fluctuations in AUM than a fund that invests in stable, low-volatility securities.
However, the volatility in AUM may also depend on whether the securities owned are liquid or how often they are marked-to-market.
- For example, an extremely illiquid security may not trade so often, and the impact on AUM may not be as frequent as it is with liquid assets.
- A private security may not be marked-to-market very often, which means the value of AUM will not change as frequently as it does with a traded security.
Investor Money and the Volatility of AUM
A fund with frequent and/or big inflows and outflows will experience more volatility in AUM, which will be an obstacle to the effective management of investing strategies, especially when the investments targeted are illiquid.
To avoid the potential damage of frequent inflows and outflows, institutions, such as mutual funds or hedge funds, can rely on some partial solutions:
- Lock-up periods, generally between a few months and a few years, during which withdrawing funds is not possible.
- Closing the fund to investors, either permanently or temporarily, so that additional money can’t flow in.
The abovementioned measures are particularly helpful because:
- They help the institution avoid phenomena such as the forced selling or buying of securities, which will be particularly problematic in the case of illiquid markets.
- They help avoid an excessive growth of AUM that would lead to problems of allocation, as it is often difficult to invest large amounts of money effectively, especially if the fund involved is targeting outperformance vs. benchmarks.
If the volatility of AUM is under control, the fund is able to pursue its investment strategy without having to increase or decrease its positions because of inflows and outflows.
Assets Under Management as a Measure of Success
Whether we are dealing with banks, asset managers, insurance companies, or other financial institutions, the size of AUM is a measure of the company’s success. That’s because it is generally correlated with other KPIs.
- A larger AUM is generally correlated with higher revenue if ROA is constant or doesn’t change significantly.
- The size of AUM is also a measure of prestige for the institution and its management, as asset managers and banks will usually be ranked based on this metric.
- Moreover, the management’s compensation and bonus packages often depend on the size of AUM.
Assets Under Management and Fund Performance
Excessive growth in AUM can be a negative factor, especially for asset managers who invest with an active style and target outperformance vs. benchmarks.
- Very large amounts of money are difficult to allocate in a timely manner and without impacting the price of the securities bought and sold.
- As a result of larger amounts of money flowing in, asset managers usually need to increase diversification, which can work against the goal of achieving a significant outperformance vs. benchmarks.
More Resources
Thank you for reading CFI’s guide on Assets Under Management (AUM). To keep advancing your career, the additional resources below will be useful:
Understanding Assets Under Management (AUM) in Mutual Fund
A mutual fund scheme comprises investments of several investors. The combined value of all the investments in a mutual fund scheme is known as Assets Under Management or AUM. The AUM keeps on changing from time to time based on investments made or pulled out of the scheme.
Let’s understand how AUM works in mutual funds and what its impact is.
What is AUM?
The total market value of the capital and assets held (and managed) by a mutual fund scheme is known as AUM. The full form of AUM is Assets Under Management.
The fund manager administers these assets and makes all investment-related decisions on behalf of the investors. AUM is a measure of a given fund house’s size and performance. The assets under management of a fund can be easily compared with other similar funds’ performance over time.
The return a mutual fund receives is also factored into the AUM value. Now, this return can be held, invested into securities, or paid out as dividends to investors (as directed by the investment mandate).
AUM is one of the many factors considered when assessing a business or an investment and is frequently taken into account together with management experience and performance. Higher AUM and investment inflows are often viewed as positive signs by investors.
How Does AUM Work?
AUM generally refers to funds that the manager can employ for transactions based on their discretion. For example, if an individual invests Rs.1 lakh in a mutual fund scheme, that sum would be pooled with other investors’ investments into the AUM.
So, without requesting special approval, the fund manager can use the invested funds to acquire and manage the AUM.
It’s also important to keep in mind that the manager (of the assets in your mutual funds) will charge a management fee to cover their compensation and fixed administrative expenses.
The payment will typically be a set rate charged to the entire fund and is allocated proportionately to each investor. When more investors invest in a fund, the AUM will rise, and the opposite will happen when fewer individuals invest in the fund.
Importance of Assets Under Management
AUM aids in increasing the firm’s market value. It could also be used as a marketing strategy to attract new clients.
The investment firm, brokerage house, or portfolio manager can earn more credibility, eventually leading to additional clients and funding for the business.
It is essential to analyse the returns of every asset under management since it shows which investment choices performed as anticipated, which ones outperformed, and which ones underperformed. Higher returns typically indicate that assets are being managed effectively.
A mutual fund with a sizable AUM could have a strong trust factor. Additionally, AUM can also be used as a liquidity indicator in the event of a big redemption. This is especially true for liquid and overnight funds, which are vulnerable to large redemptions by institutional investors.
Higher AUM for these funds indicates a better ability for shock offloading absorption.
Also Read
Impacts of AUM on Mutual Funds
A sizable asset fund can enable an asset manager to respond to shifting market opportunities by exiting or entering a specific investment when one presents itself. AUM is frequently used by investors to also calculate performance and returns. Following are the importance of AUM with respect to various investment options:
a. Equity funds
In an ideal scenario, equity funds have the potential to provide a positive return and outperform the benchmark index during market highs and lows. Equity funds rely more on the asset manager’s ability to increase returns than they do on AUM.
b. Debt funds
Total assets are one of the most important components of debt funds. Debt funds with more capital can distribute their expenses among more investors, lowering fixed fund expenses for each investor and raising returns.
c. Small-cap funds
These are typically not highly dependent on Asset Under Management and are only affected when the assets exceed a certain threshold, specifically when fund houses become the major shareholders in a particular company.
d. Large-cap funds
The yields offered by the market are the main factor influencing the returns generated by large-cap funds. Generally speaking, it is independent of the asset under management. When compared to companies with more assets, there are several instances where companies with smaller asset classes have generated significantly more revenues despite their shareholders purchasing significantly fewer shares of those institutions.
AUM growth can occasionally have a negative impact on an equity fund’s performance too. However, there is hardly any evidence to suggest that a higher AUM directly impacts the fund performance.
The fund manager is ultimately responsible for the fund’s performance. Larger assets under management have frequently made it more difficult for the manager to make quick investment decisions.
Before investing, one needs to evaluate the fund’s performance in relation to the benchmark and its competitors.
Before we move on, did you know that Navi Nifty 50 has crossed 500 crore in AUM? Now is the time to start investing with Navi Mutual Fund. We are home to a host of low-cost index funds catering to various investment goals and objectives. Download the Navi app and start investing today!
Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.
How to Calculate Assets Under Management?
Asset Under Management (AUM) is the total value of assets managed by the fund. It is the sum of all the money invested in the fund by its investors, plus any assets earned from investments held in the fund that have not been distributed to investors.
AUM is commonly expressed as a percentage of total fund capital. For example, if a mutual fund has $100 million in assets under management [AUM], then AUM = 100/1,000,000 = 10%.
Now, Asset Under Management can be calculated using several different methods. The most common method is calculating AUM by dividing total assets by total capital. In this case, it makes sense to use a long-term growth rate, such as the annualised return on investment (ROI), which considers both positive and negative returns.
Another method is to look at AUM relative to net assets, which can be done by calculating AUM relative to total net assets or gross assets.
Another calculation is net asset value per share x number of shares held. This can give an accurate picture of each individual investor’s contribution to the overall fund.
Remember, Asset Under Management fluctuates daily, reflecting the varying returns from stocks and mutual funds as well as fluctuations in fixed investment prices.
How Important is AUM for Investing?
The level of AUM is a gauge of a company’s success, whether dealing with banks, asset managers, insurance firms, or other financial organisations. This is generally because it is correlated with other key performance indicators.
The size of Asset Under Management is also an insight into the institution and its management’s prestige. Additionally, the AUM size often influences the compensation and bonus packages of the management.
Difference Between AUA and AUM?
AUA (Assets under Administration) assists with tax reporting, funds accounting and several other administrative services related to the fund, whereas an AUM refers to the total market value of the capital and assets held and managed by a mutual fund
Assets Under Management (AUM): What is and how to calculate it
Assets under management (AUM) is a term used to describe the total market value of all the assets that a company or financial institution manages on behalf of its clients. AUM is an important metric for investors because it gives them an idea of the size and scale of a company or fund, and can be used to assess its growth potential.
Why are the Assets Under Management (AUM) Indicators so important?
One of the main reasons AUM is so important for investors is that it can be used to measure a company’s or fund’s performance over time. AUM can be used to track the growth of a company or fund over time. As well as its relative performance compared to other companies or funds in the same industry. This can help investors make more informed decisions about where to invest their money.
Another reason AUM is important for investors is that it can be used to assess the risk of a company or fund. Generally, the larger the AUM, the lower the risk. This is because larger companies or funds typically have more diversified portfolios and can spread their risk across multiple assets. On the other hand, smaller companies or funds may have a more concentrated portfolio. This can make them more vulnerable to market fluctuations.
AUM can also be used to evaluate the fees charged by a company or fund. The larger the AUM, the lower the fees as a percentage of assets. This is because larger companies or funds can spread their costs over a large base, making makes them more efficient.
How to calculate AUM?
AUM is typically calculated by adding up the total market value of all the assets that a company or financial institution manages on behalf of its clients. This includes cash, stocks, bonds, mutual funds, real estate, and other investments. The formula for AUM is typical:
AUM = (Market Value of Assets + Cash and Cash Equivalents) — (Liabilities)
For example, let’s say a company manages a portfolio of stocks and bonds worth $1 million. They have $500,000 in cash and cash equivalents. The company also has $250,000 in liabilities. In this case, the AUM would be:
AUM = ($1 million + $500,000) — ($250,000) = $1.25 million
It’s important to note that AUM can fluctuate depending on the market conditions and the performance of the assets in the portfolio. For example, if the stock market goes up, the AUM of a company that manages a portfolio of stocks will surge. Similarly, if the stock market goes down, the AUM of the company will decrease as well.
Investors can track the AUM of a company or fund over time by looking at financial statements. They also can by checking the company’s website or the website of a financial data provider. AUM can also be used to compare the size and scale of different companies or funds in the same industry.
Is Assets Under Management (AUM) a deal breaker?
In summary, AUM is a measure of the total market value of all the assets that a company or financial institution manages on behalf of its clients. It can be calculated by adding up the market value of assets, cash, and cash equivalents and subtracting the liabilities. It is an important metric for investors because it gives them an idea of the size and scale of a company or fund, and can be used to assess its potential for growth, performance, risk, and efficiency. AUM can fluctuate depending on market conditions. Investors can track the AUM of a company or fund over time by looking at financial statements.
AUM is an important metric for investors because it gives them an idea of the size and scale of a company or fund, and can be used to assess its potential for growth, performance, risk, and efficiency. Investors should keep this in mind when making investment decisions.