What Does Assets Under Management (AUM) Mean? 

Introduction

Assets Under Management (AUM) is a widely used term in the investment world, representing the total market value of assets that an investment firm or financial institution manages on behalf of its clients. AUM provides a quick snapshot of the scale and influence of a fund or advisory business. In this article, Steve Rowe explains what AUM means, how it is calculated, and why it’s significant to both fund managers and investors. Understanding AUM can help investors evaluate funds, compare fees, and determine if a fund aligns with their financial goals and risk tolerance.

What Are Assets Under Management (AUM)?

Assets Under Management (AUM) refers to the total value of financial assets that a fund or financial institution manages on behalf of its clients. This measure includes all types of investments such as stocks, bonds, mutual funds, real estate, and alternative assets. AUM is an indicator of a fund’s size, influence, and reach within the financial market, and is often used to measure the success and growth of an investment firm or portfolio. While AUM can vary based on client contributions, withdrawals, and market performance, it serves as a valuable metric for both the firm and its investors.

Why is AUM Important?

AUM is an essential metric in the investment industry, as it directly correlates with a firm’s revenue potential and market presence. For investors, AUM provides insight into the scale and resources available to the fund, which can affect the quality of management and research capabilities. Additionally, a larger AUM often brings economies of scale, potentially reducing management fees for investors. However, larger AUM does not always guarantee better performance; it’s a balance between scale and the fund’s ability to manage those assets effectively. Ultimately, AUM is a useful tool but should be evaluated alongside other factors when choosing an investment.

Example of AUM for a Mutual Fund

Consider a mutual fund with £1 billion in AUM. This means the fund has £1 billion invested across various assets on behalf of its clients. If investors contribute an additional £100 million, and the fund experiences market growth of £50 million, the AUM will increase to £1.15 billion. Conversely, if market performance declines, or clients withdraw funds, the AUM will decrease. This example shows how AUM fluctuates based on investor activity and market conditions, impacting the fund's overall resources and management approach.

How to Calculate Assets Under Management

Calculating AUM involves summing the total market value of all assets managed by a fund or firm. This includes cash, investments, and any other client assets under the firm’s management. Adjustments are made for any inflows (such as new investments) and outflows (withdrawals). Market performance also impacts AUM, as the value of the assets themselves fluctuates. Investment firms often calculate AUM on a daily, monthly, or quarterly basis, providing a clear picture of the fund’s size and performance over time.

AUM offers a snapshot of a fund's scale and resources, which can be reassuring for investors. However, it’s essential to balance AUM with performance metrics to ensure the fund meets your goals. Steve Rowe – Chartered Financial Planner at Lucent

How AUM Changes Over Time

AUM is not static; it evolves over time based on a variety of factors. Client contributions, withdrawals, and market performance all contribute to fluctuations in AUM. Market gains boost AUM as asset values rise, while market declines decrease it. Additionally, large redemptions can impact AUM, especially in mutual funds where investors may redeem their holdings. This dynamic nature of AUM requires fund managers to adjust their strategies, ensuring that the fund’s investments remain aligned with its objectives, regardless of inflows and outflows.

AUM and Fees

In many cases, investment management fees are based on AUM, as this structure aligns the interests of the fund and its clients. Management fees, often charged as a percentage of AUM, rise as the fund grows. For instance, a fund charging a 1% fee on £1 billion AUM generates £10 million in fees. This fee structure can be beneficial for investors, as larger funds may lower the fee rate due to economies of scale. However, high AUM funds with percentage-based fees can become expensive over time, so it’s essential to evaluate fees relative to performance.

AUM and Investment Management Strategy

AUM plays a significant role in shaping an investment manager’s strategy. A larger AUM may provide more flexibility to diversify into various asset classes, potentially reducing risk. However, a very high AUM can also limit a fund’s agility, making it harder to adjust positions or invest in small-cap assets. Smaller funds may have more nimbleness in responding to market changes, while larger funds can leverage their scale for stability. Effective AUM management helps balance these considerations, aligning the strategy with both fund goals and investor expectations.

Learn more about our approach to investment management.

AUM and Investor Psychology

Investor psychology often links a high AUM with credibility and stability. Large AUM funds can attract more investors, as size may be perceived as a sign of success and effective management. However, this perception can be misleading; a high AUM does not guarantee superior returns. Understanding AUM’s impact on investor psychology can help investors make more informed decisions, focusing on fund quality and performance rather than just size. For new investors, learning to evaluate AUM objectively can prevent over-reliance on fund size as a measure of quality.

How Is AUM Used as a Tool by Investment Companies?

Investment companies use AUM as a marketing tool to signal the firm’s scale, resources, and expertise. A larger AUM can enhance a company’s reputation, attract more clients, and increase its negotiating power with brokers. Additionally, AUM allows companies to measure growth, assess fund popularity, and make adjustments to their strategies. In client meetings, AUM data is often used to highlight performance metrics and showcase the firm’s capabilities. However, AUM is just one aspect of the value that an investment firm brings to clients.

While high AUM can support a well-resourced fund, it may also reduce flexibility, impacting performance. For investors, understanding how a fund manages its AUM is key to evaluating long-term potential. Steve Rowe

What Does AUM Tell Potential Investors?

For potential investors, AUM serves as a useful metric to assess the fund’s size, stability, and market presence. Funds with high AUM are often viewed as established and reliable, attracting investors who value security. However, AUM can also highlight potential risks, especially if the fund’s strategy is not aligned with such a large asset base. Investors should consider AUM in conjunction with the fund’s historical performance, fees, and risk profile, ensuring that the fund meets their objectives beyond just size.

What Is the Benefit of a Fund with a Large AUM?

A fund with a large AUM offers several benefits, including economies of scale, which can lead to lower fees and enhanced access to market resources. Large funds may have more flexibility to invest in diverse asset classes, potentially reducing risk and improving stability. However, large AUM can also limit agility and may require managers to adjust their strategies to manage substantial assets effectively. While large AUM funds often have more resources for research and portfolio management, it’s important to weigh these benefits against the fund’s ability to adapt to changing markets.

How AUM Can Affect Fund Performance

While large AUM can support a diversified portfolio, it may impact performance if the fund struggles to allocate such significant assets efficiently. Large AUM funds can face challenges in adjusting positions quickly or in managing large inflows and outflows. Conversely, smaller funds may have more flexibility and can potentially achieve higher returns through targeted investments. Understanding how AUM affects performance can help investors choose funds that align with their risk tolerance and expectations for growth.

AUM and Fund Liquidity

AUM influences a fund’s liquidity, especially in markets where it may be difficult to quickly buy or sell large asset quantities. Funds with high AUM may encounter liquidity challenges, as their sheer size can limit the fund’s ability to liquidate assets without impacting market prices. For investors, understanding the relationship between AUM and liquidity is crucial, particularly if they may need access to their investments during market volatility. Funds with balanced AUM and liquidity strategies are often better positioned to meet both client expectations and market demands.

Summary

Assets Under Management (AUM) is a central metric in the investment world, representing the total value of assets managed by a fund or institution. While AUM can signal a fund’s size, resources, and credibility, it’s only one factor to consider when evaluating investments. A high AUM can bring benefits like lower fees and increased stability, but it can also pose challenges to flexibility and performance. By understanding AUM in context—alongside fees, strategy, and performance—investors can make more informed decisions that align with their financial goals and risk tolerance.

Disclaimer: This article does not constitute financial advice. We recommend that you speak to a qualified financial planner for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.