Assets under management (AUM) is equal to the market value of investments that either an institution or individual manages on behalf of its clients.
AUM can be measured for financial institutions like banks, mutual funds, and hedge funds. It can refer to the entire amount of assets managed for all clients, or it can refer to an individual client’s assets.
Because asset prices and money inflows and outflows change daily, AUM is constantly changing. Those managing client assets often charge fees as a percentage of the individual client’s AUM. Management fees are typically measured in basis points (BPS).
What does AUM tell us?
A firm with a high AUM tells us that it is handling a large amount of capital. An organization with a high AUM makes significant profits on management expenses and fees. This tells us it likely has a high number of clients, clients with plenty of capital, or both. Typically, a firm with a high AUM has been managing money successfully and has been around for at least a few years.
A firm with a low AUM means not many people are trusting it to manage their money yet. This is not necessarily a bad thing. Raising assets takes time, and a firm just starting out will have a low AUM no matter how well it manages money. Signing one large client can have an enormous positive impact on a firm’s total AUM.
What causes AUM to fluctuate?
AUM changes constantly due to multiple factors. First, AUM changes when the value of securities that client assets are invested into changes. The more volatile the securities are, the more often and dramatic the changes in AUM will be. The smaller the number of securities in a portfolio, the greater the AUM changes will likely be.
To demonstrate this, let’s look at an example. Imagine that Mutual Fund A has an AUM of $50M, and it has 20 tech companies in its portfolio. A new software is invented, causing 5 of the holdings to nearly double in price overnight.
Because the portfolio has just 20 holdings, the significant price change of 5 of its holdings skyrockets the fund’s overall price. As a result, the value of the fund’s assets managed increases. This causes its AUM of $50Mto increase significantly.
Mutual Fund B is invested in 100 US government securities, a much less volatile asset type. It also has an AUM of $50M. However, a significant change in five of Mutual Fund B’s holdings is less likely, and it would have far less of an impact on the portfolio’s overall price. Total AUM will still fluctuate slightly, but not nearly as much as with Mutual Fund A.
Another factor that causes AUM to change is inflows and outflows. Let’s look at an example of a firm’s AUM to demonstrate this. Imagine that Firm A has an AUM of $100M. Its biggest client is Bella, a wealthy investor with $22M in assets. Over time, Bella decides she doesn’t like the way Firm A is handling her money, so she withdraws all of her assets.
As a result, Firm A sees an instant 22% decrease in its AUM because of one unhappy client. This is an extreme example, but it shows the significant impact inflows and outflows can have on a firm’s AUM. Other factors that can cause AUM fluctuations include fund closures, dividends paid, and lock-up periods.
Assets under management is the value of client investments that are managed by a financial institution or individual. The term’s meaning can vary depending on the type of financial institution and whether it is referring to total assets or the assets of an individual client.
Firms with high AUMs typically have longer track records, greater client trust, and can charge higher management fees. AUM can fluctuate due to a variety of reasons including asset volatility, portfolio size, and inflows and outflows.
