What is an Assets Under Management - AUM
Assets under management (AUM) is the total market value of assets that an investment company or financial institution manages on behalf of investors. Assets under management definitions and formulas vary by company.
Some financial institutions include bank deposits, mutual funds and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns responsibility to the company.
Assets Under Management
BREAKING DOWN Assets Under Management - AUM
Assets under management describes how much of investors’ money an investment company controls. Investments are held in various investment vehicles including mutual funds, exchange-traded funds (ETFs) and hedge funds. Products are managed by a venture capital company, brokerage company or portfolio manager.
AUM can be segregated in many ways. It is used to indicate the size of a fund and can refer to the total amount of assets managed for all clients or the total assets managed for a specific client. It includes the funds the manager can use to make transactions. For example, if an investor has $50,000 invested in a mutual fund, those funds become part of the total AUM and the fund manager can buy and sell shares in accordance with the fund's investment objective using all of the invested funds without obtaining any special permissions.
Fluctuating daily, AUM depends on the flow of investor money in and out of a particular fund and asset performance. Increased investor flows, capital appreciation and reinvested dividends will increase the AUM of a fund. Adversely, decreased investor flows and market value losses will decrease the AUM of a fund. In the United States, once a firm has more than $30 million in assets under management, it must register with the Securities and Exchange Commission.
Methods of calculating assets under management varies among companies. Total firm assets under management will increase when investment performance increases or when new customers and new assets are acquired. Factors causing decreases in AUM include decreased market value from investment performance losses, fund closures and client redemptions. Assets under management includes all of the investor capital invested across all of the firm’s products and can include capital owned by the investment company executives.
Why AUM Matters
Monitoring AUM by investment strategy and investor product flows is important for management in determining the overall strengths and weaknesses of a firm. Investment companies also use assets under management as a marketing tool to attract investors. AUM can help investors get an indication of the size of a company's operations relative to its competitors.
AUM as a Factor for Investment
AUM may also be an important consideration for new fund investors and wealth management services comprehensively. Products with higher AUM can typically have higher market trading volumes which positively influence the liquidity of a product.
For example, the SPDR S&P 500 ETF (SPY) is one of the largest equity ETFs in the investable market. As of November 15, it had assets under management of $245.6 billion with average daily trading volume of 63.8 million shares. The high trading volume means liquidity is not a factor for investors when seeking to buy or sell shares of the ETF. In comparison, the First Trust Dow 30 Equal Weight ETF (EDOW), which is also an investment product within the equity universe, has assets under management of $2.1 million and much lower trading volume. Liquidity for this fund could be a consideration for investors since its trading volume is also low at an average of 2,046 shares traded per day.
Within the wealth management industry, some investment managers may have requirements based on AUM, and it may determine if an investor is qualified for a certain type of investment. An investor’s individual AUM can also be a factor in determining the type of services received from a financial advisor or brokerage company. In some cases, individual assets under management may also coincide with an individual's net worth.
For investors, AUM may also be an important consideration for fees. Investment products can charge management fees that are a fixed percentage of assets under management. Financial advisors also often charge clients by their total assets under management. Therefore, it is important for investors to understand AUM, both from an investment company and personal wealth perspective, and to understand how it is calculated.
Overall, AUM is only one aspect used in evaluating a company or investment. It is usually also considered in conjunction with management performance and management experience. However, while it is only one aspect used by investors in investment decisions, generally investors can consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience.