The Fundamentals of Assets Under Management (AUM): Understanding the Definition and Calculation Methods

Last updated 03/20/2024 by

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Summary:

We explain the concept of Assets Under Management (AUM) and its calculation. The total value of the assets that a financial institution manages on behalf of its clients, such as stocks, bonds, real estate, and other investments, is known as AUM. It is a significant metric in the finance industry, reflecting the size of the financial institution’s business and its ability to generate revenue from managing those assets. Daily changes in AUM occur due to the inflow and outflow of funds and changes in asset prices. The calculation of AUM is the market value of all assets that an investment firm manages on behalf of its clients. It includes publicly traded securities, real estate, and private equity investments.

What is Asset Under Management?

Assets under management (AUM) refers to the total value of assets, such as stocks, bonds, real estate, and other investments, that a financial institution, such as a mutual fund company, hedge fund, or investment management firm, manages on behalf of its clients.

AUM is an important metric in the finance industry as it reflects the size of the financial institution’s business and its ability to generate revenue from managing those assets.

The financial institution earns fees based on a percentage of the AUM, which is typically referred to as the management fee.

AUM can also be used as a measure of the performance of an investment manager. If the value of the AUM increases over time, it suggests that the investment manager has successfully generated returns for its clients.

Conversely, if the value of the AUM decreases, it may suggest that the investment manager has not been successful in generating returns or that clients are withdrawing their funds.

Calculation of assets under management

Assets Under Management (AUM) is a key metric used by investment firms and financial professionals to measure the value of assets that they manage on behalf of their clients. The formula for calculating AUM is relatively straightforward:

AUM = market value of assets under management

To calculate AUM, you need to determine the market value of all the assets that the investment firm is currently managing on behalf of its clients.

This includes stocks, bonds, mutual funds, and any other financial instruments that are included in the portfolio.

Here are the steps to calculate AUM:

Compile a list of all the financial assets managed by the investment firm. This may include equities, fixed-income securities, derivatives, commodities, and real estate, among other asset classes.
Determine the market value of each asset. For publicly traded securities, this is simply the current market price multiplied by the number of shares or units held in the portfolio.
For other assets, such as real estate or private equity investments, a valuation may need to be conducted to determine the current market value.
Add up the market value of all the assets to arrive at the total AUM for the investment firm.

For example, suppose an investment firm manages a portfolio that includes 100,000 shares of stock A, which is currently trading at $50 per share, and 50,000 units of a bond fund, which has a net asset value (NAV) of $10 per unit.

The AUM for this portfolio would be:

AUM = (100,000 shares of stock A x $50 per share) + (50,000 units of bond fund x $10 NAV per unit)

AUM = $5,000,000 + $500,000

AUM = $5,500,000

Therefore, the AUM for this portfolio is $5.5 million.

Example of assets under management (AUM)

Sure, here’s an example of AUM calculation for a hypothetical investment firm:

XYZ Investments is a registered investment advisor that manages investment portfolios for high-net-worth individuals and institutional clients. In the last quarter, the firm had the following assets under management:

1. Equity securities

10,000 shares of Apple Inc. (AAPL) with a market value of $1,200,000

5,000 shares of Amazon.com Inc. (AMZN) with a market value of $1,750,000

2,000 shares of Facebook Inc. (FB) with a market value of $500,000

8,000 shares of Google (Alphabet Inc.) (GOOGL) with a market value of $2,400,000

2. Fixed income securities

2,000 units of a high-yield bond fund with a NAV of $20 per unit, for a total market value of $40,000

3,000 units of a municipal bond fund with a NAV of $25 per unit, for a total market value of $75,000

3. Alternative investments

10% ownership in a private equity fund with a current valuation of $4,000,000

20% ownership in a real estate investment trust (REIT) with a current valuation of $3,000,000

To calculate the AUM for XYZ Investments, we would add up the market values of all these assets:

AUM = $1,200,000 + $1,750,000 + $500,000 + $2,400,000 + $40,000 + $75,000 + $4,000,000 + $3,000,000

AUM = $13,965,000

Therefore, as of the end of the last quarter, XYZ Investments had an AUM of $13,965,000. This number would be used by the firm to report their assets under management to regulatory bodies, investors, and other stakeholders.

It is an important metric for the firm’s performance, growth, and profitability.

Importance of assets under management (AUM)

Revenue Generation

Assets under management (AUM) are a key source of revenue for financial firms such as investment banks, asset management companies, and hedge funds. The fees charged on these assets generate a significant portion of their earnings.

Client retention

AUM is also an important metric for measuring client retention. When clients see that their investments are growing and performing well, they are more likely to stay with the firm and entrust them with additional investments.

Investment performance

AUM is often used as a measure of investment performance, as it reflects the ability of a firm to attract and retain assets. Strong investment performance can lead to increased AUM, while poor performance can result in outflows and a decline in AUM.

Competitive advantage

AUM can also be a competitive advantage for financial firms, as it allows them to negotiate better deals with brokers, custodians, and other service providers. Additionally, firms with larger AUM may be able to offer more products and services to clients.

Regulatory compliance

AUM is also important for regulatory compliance, as many financial regulations are tied to the number of assets under management.

For example, some investment advisers are required upon reaching a particular level of AUM, they are expected to sign in with the Securities and Exchange Commission (SEC).

AUM And government regulations

Governments around the world regulate the management of assets under management (AUM) to protect investors and ensure that financial institutions operate in a fair and transparent manner. The regulations vary depending on the jurisdiction and the type of financial institution involved, but they generally aim to prevent fraud, misconduct, and conflicts of interest.

In the US, SEC regulates investment advisers who manage assets worth over $100 million, while smaller advisers are regulated by state securities regulators. The SEC requires investment advisers to register and disclose information about their business, including their fees, investment strategies, and potential conflicts of interest.

In Europe, the ESMA regulates investment management firms, which are required to register with national regulators and comply with EU rules on investor protection, disclosure, and transparency.

Other countries have their own regulatory frameworks for AUM. For example, in Canada, investment advisers are regulated by provincial securities regulators, while in Australia, ASIC regulates financial advisers who manage assets on behalf of retail clients. Regulations can also affect the calculation and reporting of AUM. For example, under the Global Investment Performance Standards (GIPS), investment firms must disclose their total assets under management, net of performance-based fees, and must also disclose any changes in their definition of AUM.

This helps to ensure that AUM figures are reported consistently and accurately across the industry.

Conclusion

In conclusion, assets under management (AUM) is a critical financial metric that measures the total value of assets that a financial institution or investment manager manages on behalf of clients. Calculating AUM involves summing up the total market value of all the securities, investments, and other assets that the manager or institution manages on behalf of its clients.

AUM provides a useful indicator of the financial health and performance of an investment manager or financial institution, and it is often used by investors and analysts to evaluate the performance of investment funds and portfolio managers. AUM can also be used to measure the size and growth of an investment company or fund.

Understanding AUM and how it is calculated is necessary for investors who want to make informed decisions about their investments and for financial professionals who want to manage their client’s; assets effectively.

Key takeaways

Assets under management (AUM) is the term used to describe the total market value of the investments that a person or organization manages on behalf of investors.
Daily changes in AUM are a result of the inflow and outflow of funds and changes in asset prices.
Funds with higher AUMs are typically easier to trade.
AUM is frequently used to calculate a fund’s management fees and expenses.

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