The entire market value of the investments that an individual or organization manages on clients’ behalf is known as assets under management (AUM). Companies use different definitions and calculations for assets under management.
Companies use different definitions and calculations for assets under management. Some financial organizations include cash, mutual funds, and bank deposits in their calculations. Others restrict it to funds under discretionary management, in which case the investor gives the business permission to execute trades on their behalf.
Overall, AUM is merely one factor used in assessing a business or investment. It is frequently taken into account together with management experience and performance. Investors, however, frequently view bigger investment inflows and AUM comparisons as an indication of quality and management experience.
Assets under Management example for Mutual fund
Let's consider the example of a mutual fund with a significant cash position and a diversified portfolio of bonds and stocks. Assume the mutual fund's portfolio consists of $1 billion in cash, $1.5 billion in stocks, $2 billion in government bonds, and $1.5 billion in corporate bonds.
The assets under management for the fund will be $6B in total.
How does Assets Under Management (AUM) work?
The amount of money a hedge fund or financial institution is managing for its clients is referred to as assets under management (AUM). Moreover, AUM is the total market value of all the investments managed by a fund or family of funds, a venture capital business, a brokerage house, or an individual who is licensed as a portfolio manager or investment advisor.
AUM can be divided in a variety of ways depending on the quantity or amount being indicated. It may be used to describe the total assets handled for all clients or the total assets managed for a particular client. AUM involves the capital that the manager may employ to make transactions for one or all customers, typically on a discretionary basis.
For instance, if a shareholder invests $50,000 in a mutual fund, that $50,000 becomes a part of the overall AUM, or pool of funds. The fund manager is free to use all of the invested funds to buy and sell shares following the investment goal of the fund without requesting any additional special permissions.
Some investment managers in the wealth management sector may have specifications based on AUM. In other words, an investor may require a minimum level of personal AUM for an investor to qualify for a certain style of investment, such as a hedge fund. Wealth managers aim to ensure their clients can endure volatile markets without suffering severe financial losses.
Calculating Assets Under Management (AUM)
How assets under management are calculated? This isn't a straightforward question, as different companies use different methods for AUM calculation. For instance, some organizations/investors include cash and bank deposits in the calculation, whereas others only count discretionary investment funds as assets under management. Additionally, assets under management can alter from one day to the next as cash flows in and out of a fund.
Your mutual funds' assets under management may increase due to several factors, including:
- The number of dividends that the portfolio's companies have paid out
- The performance of assets
- Acquiring new clients and resources
Additionally, several factors, such as the following, may cause a decrease in the assets under management:
- Losses in investment performance
- Fund closures
- Decrease in investor flows
For funds and investment businesses to register with the Securities and Exchange Commission (SEC) in the U.S., they must meet certain AUM standards.
AUM can also be determined for the whole mutual fund as well as for a particular client.
A simple example of a mutual fund that invests in stocks, corporate and government bonds, and cash is the following:
$2 billion in stocks + $1 billion in corporate bonds + $1 billion in government bonds + $1 billion in cash = $5 billion in AUM
AUM vs. NAV for ETFs and mutual funds
Net asset value (NAV) for a mutual fund or ETF is determined by deducting all liabilities from entire assets and dividing the result by the number of shares outstanding.
NAV is equal to (Total Fund Assets - Total Liabilities) / Outstanding shares
Investors can buy shares of mutual funds and ETFs for a price per share known as NAV, which is expressed on a per-share basis.
AUM, which is not expressed on a per-share basis, stands for the total market value of assets managed by an individual or a company (not a fund).
AUM for ETFs
AUM, or Assets Under Management, is one of the indicators used to evaluate an ETF or Exchange-Traded Fund.
An ETF's shares are less likely to fluctuate in value the more assets it holds and the larger the volume of trading.
Because of this, investing in these kinds of funds is secure and reliable.
One of the biggest equities ETFs available is the SPDR S&P 500 ETF (SPY).
On March 11, 2022, the SPY had $380.7 billion in AUM and 113 million shares were traded on average per day.
The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the Dow Jones Industrial Average's (DIJA) 30 equities.
The EDOW had $130 million in assets under management as of March 11, 2022, while the SPY averaged about 53,000 shares per day in trading volume.
Importance of Assets Under Management (AUM)
To assess the strength of the company, firm management will track AUM about the investment strategy and investor product flows. Assets under management are another strategy used by investment firms to entice new investors. Investors can use AUM to gain a sense of how big a company is in comparison to its rivals.
AUM might also play a significant role in determining how much to charge. Many investment products have preset percentage-of-assets-under-management management fees.
Bottom line
Assets Under Management (AUM) refers to the total market value of the investments that a person or organization manages on behalf of investors. AUM changes daily, based on the inflow and outflow of money as well as the performance of asset prices. Larger AUM funds are typically easier to trade. The management costs and expenses of a fund are frequently calculated as a percentage of AUM.
