Assets Under Management

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21 Aug, 2024

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Assets under management (AUM), also referred to as funds under management, is the aggregate market value of all the investments managed by a financial institution. It is an important financial metric studied by investors before choosing their fund management institution. It also helps in the calculation of management fees.

AUM is viewed concerning the net investment value of a specific client or all of the firm's clients. However, the latter is more prominent as it indicates the company's financial performance. The value of AUM keeps changing with the current market price of the investments.

Assets Under Management (AUM) Meaning

Assets under management can be referred to as the current market value of all the investments a financial institution manages for its clients.
The greater the value of AUM, the higher the prominence of the firm and its reliability.
AUM is an essential financial metric for two important reasons – firstly, it helps investors find the best investment management company to manage their assets. Secondly, it is used to determine the assets under management fees.
Like most other financial aspects, the United States Securities and Exchange Commission regulates the AUM managed by an asset manager.

Assets Under Management (AUM) Explained

Assets under management (AUM) is a significant parameter in the financial world. It answers financial questions like - how many investments does a company manage? What is the net value of the investments that the company manages? Finally, how many investors have trusted their assets with the company? The higher the answer to these three questions, the more glory to the company.

A wealthy investor who is not concerned by higher fees but wants maximum returns of their asset will probably choose an asset manager based on its AUM. Thus, the AUM indicates the financial performance of the firm. Also, based on the funds under management, the firm collects fees from other clients.

So, what are the investments which qualify as AUM? Any liquid asset of the investor they have entrusted the asset manager with monitoring and control. For example, bank deposits, cash balances, equity shares, bonds, mutual funds, and other investments.

What are the services an asset manager provides to their clients? The most important function is decision-making. With the constant fluctuations and rapid movements in the market, an asset manager has to make decisions about holding or selling an investment. The firm communicates with the investors and advises them about the necessary action.

Once the decision is taken, the firm acts on the decision, i.e., the investor does not have to enter the field. In addition, the asset management company will buy, sell, and make any other transactions on behalf of the investor. Finally, the firm also renders services like accounting, tax reporting, proxy voting (equity shares), client reporting, and other financial services.

Calculation

The way that companies determine their AUM varies. It is influenced by the inflow and outflow of investor capital from a certain fund, and as a result, they are subject to daily fluctuations. The AUM of a fund will also rise as a result of asset performance, capital growth, and reinvested dividends. Additionally, the overall AUM may rise when new clients and their assets are acquired.

Assets under management calculation can be done in two ways, depending on what is to be determined. Let's read about it in the following section –

1. Client's Total Investment Value

(i) The total investment value of a client is the current market price of all the assets an investor owns. Usually, it includes investments only managed by the firm. But some companies also include bank deposits, cash balances, and mutual funds. At times, the value is equal to the individual's net worth. This value is affected by market conditions, capital appreciation, reinvested dividends, and asset performance.

2. Total Value Of The Firm's Managed Investment

(ii) The total value of investments managed by a firm considers all the clients a firm serves. Therefore, the more the number of clients and the higher the individual investment value of the investors, the more the AUM of a firm.

Example

BlackRock, Inc. is an American investment management company. It holds the first position in the global assets under management ranking, with a total of $10 trillion. Recently, BlackRock's AUM fell 16% in the third quarter of 2022. The decline was accompanied by a fall in bond and equity markets. It is most likely because of rising interest rates put forward by the central banks to counter inflation.

On September 30, the firm's AUM fell to $ 7.96 trillion. It was the lowest since 2022. Further, the net adjusted income of the third quarter decreased by 17% compared to a year earlier. The firm had estimated a net of $104 billion from long-term fund inflows but attracted only $65 billion.

Assets Under Management vs Assets Under Administration

Assets under administration (AUA) or assets under custody is similar to AUM. However, certain differences do exist. Let's analyze them.

Assets under administration (AUM) is the total value of all the investments under the administration of a financial institution. Here, the administration does not imply management because the former does not provide the firm any discretion to manage the assets (asset allocation, buying, and selling).
Under AUA, the financial institution is an intermediary between fund managers and investors.
Administrative services include tax reporting, fund accounting, settlement, safekeeping, etc.
Most companies that maintain AUM also hold assets under custody. Like the former, the latter is an important indicator and speaks about the firm's financial performance.

Frequently Asked Questions (FAQs)

How to calculate assets under management?

Assets under management calculation depend on what is to be determined. For instance, to find the AUM of a particular client, first, estimate the market value of each investment held by the individual. Then, sum up all the market values to arrive at the total.
Alternatively, to determine the total AUM of an asset management company, find the AUM of all investors whose assets the company manages and add the values. This is one of the most important parameters. Bank deposits, equities, bonds, mutual funds, cash, etc., can be considered in the calculation.

Who has the most assets under management?

As of January 2022, BlackRock, Inc., an American investment management company, tops the assets under management ranking with a total AUM of $10 trillion.

Are assets under management on the balance sheet?

No. A firm's AUM is not accounted for in its balance sheet because they are not a part of the company's assets. Instead, they are the client's assets.