Assets Under Management

Core Description

• Assets Under Management (AUM) is a core metric that represents the total market value of client assets managed by an investment firm at a specific point in time.
• AUM signals an institution’s scale, revenue potential, and operational strength, but must be interpreted in context with performance, risk, and methodology.
• Understanding how AUM is calculated, reported, and used helps investors make informed decisions and compare asset managers accurately.

Definition and Background

Assets Under Management (AUM) refers to the cumulative market value of all assets that a financial institution or investment manager oversees on behalf of clients at a specific valuation date. This includes equities, bonds, cash, mutual funds, exchange-traded funds (ETFs), and alternative investments. The specific types of assets included in AUM can vary between firms and are often influenced by regulatory requirements, internal policies, and industry standards.

Historical Evolution

The concept of AUM originated in the 19th century, rooted in private banking and trusts, where tracking and reporting total asset value was fundamental to fiduciary duty. As pooled investment vehicles such as mutual funds became increasingly popular throughout the 20th century, AUM emerged as a standard benchmark for managerial capacity, partially governed by legislation such as the US Investment Company Act of 1940 and ERISA in 1974.

With the growth of institutional investing and index benchmarks in the 1980s, AUM became a key industry metric for consultants, rating agencies, and regulators. Today, asset managers and wealth advisors globally use AUM to benchmark scale, allocate resources, and ensure regulatory compliance.

Importance of AUM

AUM serves as the foundation for business scalability, technology investment, product development, and due diligence processes. However, AUM alone does not measure performance, risk, or client outcomes. It should be considered as part of a broader due diligence framework.

Calculation Methods and Applications

Calculation of AUM

The calculation of AUM typically involves summing the fair value of all eligible client assets at the close of the reporting period, taking into account:

• Types of assets: Equities, bonds, cash, mutual funds, ETFs, and alternatives.
• Valuation basis: Market closing prices, third-party evaluated marks for illiquid assets, and quoted NAVs for funds.
• Currency translation: For managers with global portfolios, assets are converted to a chosen reporting currency using spot rates.
• Gross vs. net exposures: Some firms report AUM gross of leverage or derivatives, while others net them out.
• Discretionary vs. non-discretionary: Assets may be categorized depending on whether the manager has full investment authority.

Basic formula:

AUM (T) = AUM (T-1) + Net Flows + Investment Return + FX Adjustment + Other Adjustments

Where:

• Net Flows reflect client contributions (subscriptions) minus withdrawals (redemptions).
• Investment Return accounts for market performance and income.
• FX Adjustment translates non-base currency assets.
• Other Adjustments include fees, dividends, or reclassifications.

Applications of AUM

• Revenue and fee calculation: Many firms charge management fees as a percentage of AUM, often subject to minimums or breakpoints at larger asset scales.
• Due diligence and screening: Institutional investors use minimum AUM thresholds when shortlisting managers for mandates.
• Operational and risk management: AUM is used to assess trading liquidity, operational capacity, and system robustness.
• Market share and benchmarking: Industry rankings and peer analyses are often based on total reported AUM.

For example, BlackRock, the world’s largest asset manager, reported more than USD 9,000,000,000,000 in AUM as of 2022, demonstrating its global scale and product diversification (source: BlackRock Annual Report).

Comparison, Advantages, and Common Misconceptions

Advantages of AUM

• Scale and stability: Higher AUM indicates a firm’s capacity to invest in research, technology, and risk systems.
• Negotiation power: Larger AUM allows for better fee negotiations with brokers and increased access to liquidity.
• Client confidence: Institutional clients and advisors view high AUM as evidence of operational robustness and durability.

Disadvantages and Limitations

• Not a direct measure of skill: Growth in AUM may result from market rallies, mergers, or marketing efforts rather than from superior investment returns.
• Scale-related risks: Large asset pools can encounter capacity constraints, liquidity bottlenecks, and herding behavior.
• Methodological inconsistency: Firms may count assets differently, making direct comparisons challenging.

AUM Compared to Related Metrics

Common Misconceptions

• AUM equals performance: High AUM does not guarantee strong risk-adjusted returns.
• Bigger is always better: Larger AUM can reduce flexibility and performance in certain strategies.
• All assets are comparable: Some firms include advisory or non-discretionary assets; it is important to verify definitions in disclosures.
• AUM growth means client growth: Increases in AUM can result from asset appreciation, not just new client acquisition.

Practical Guide

Effectively evaluating and utilizing AUM as an investor or investment professional requires clear understanding and careful analysis.

How to Interpret AUM

• Check the scope: Determine whether the figure includes only discretionary assets or also advisory and non-discretionary mandates.
• Understand inclusion criteria: Examine whether cash, deposits, or unfunded commitments are counted, and whether derivatives and leverage are included.
• Look for supporting data: Assess AUM in combination with net flows, risk statistics, historical performance, and team experience.
• Examine trends: Separate AUM growth from market appreciation versus net new investment.

Steps for Due Diligence

1. Ask for methodology: Seek transparency regarding what assets are counted and how they are valued.
2. Compare apples to apples: Use standardized industry platforms (such as GIPS-compliant disclosures and SEC Form ADV filings) for benchmarking.
3. Monitor liquidity and capacity: Recognize that large AUM in a capacity-constrained asset class can present execution challenges.
4. Evaluate fee structures: Check if management fees decrease at higher AUM or if higher balances incur increased “fee drag.”

Case Study: Evaluating a Multi-Strategy Asset Manager (Hypothetical Example)

Suppose OakHill Management, an international asset manager, reports USD 50,000,000,000 in AUM. Upon review:

• USD 40,000,000,000 are in actively managed fixed income and equity strategies (discretionary).
• USD 7,000,000,000 are in advisory-only relationships (non-discretionary).
• USD 3,000,000,000 represent money market sweep accounts.

A detailed review of OakHill’s disclosures reveals:

• Reported AUM includes both discretionary and non-discretionary mandates.
• Recent policy changes resulted in a 10 percent “increase” in AUM by adding new advisory relationships, with no new net inflows.
• Net investment returns lag the benchmark, and net flows are flat.

Analysis: While the headline AUM figure appears substantial, most recent growth is due to methodological changes rather than client inflows or performance. An informed investor would supplement AUM information with additional due diligence focused on returns, risk, and client stability.

Resources for Learning and Improvement

• Textbooks:

  • Investments by Bodie, Kane, and Marcus – foundational portfolio management concepts
  • Modern Portfolio Theory and Investment Analysis by Elton and Gruber

• Seminal Papers:

  • Berk & Green (2004), “Mutual Fund Flows and Performance in Rational Markets”
  • Fama and French’s studies on benchmarking and risk

• Official Guidance:

  • US SEC’s Form ADV instructions and FAQs
  • European Securities and Markets Authority (ESMA) UCITS/AIFMD guidance
  • GIPS Standards by the CFA Institute

• Industry Reports:

  • McKinsey’s Global Asset Management Review
  • PwC’s Asset and Wealth Management Reports
  • ICI and EFAMA Yearbooks (industry statistics)

• Professional Certifications:

  • Chartered Financial Analyst (CFA) Program – with focus on portfolio measurement and reporting
  • Certificate in Investment Performance Measurement (CIPM)

• Data Providers:

  • Morningstar and Lipper for fund research and AUM rankings
  • Bloomberg and S&P Global for financial data

• Newsletters and Journals:

  • Pensions & Investments, Financial Times Markets Newsletter, Bloomberg Markets
  • Journal of Portfolio Management, Financial Analysts Journal

FAQs

What is Assets Under Management (AUM)?

Assets Under Management (AUM) refers to the total market value of all financial assets that a manager oversees for clients at a given point in time. This figure fluctuates with market changes and client flows.

How is AUM calculated?

AUM is calculated by summing the fair market value of included assets on a specific reporting date, adjusting for subscriptions, withdrawals, performance, and currency effects. Inclusion criteria may vary.

What assets are typically included in AUM?

AUM often includes equities, bonds, cash, mutual funds, ETFs, and sometimes advisory accounts or sweep balances. Discretionary assets are usually the main component, with other elements varying by firm.

How does AUM differ from NAV, market capitalization, and AUA?

AUM represents the total market value managed for clients. NAV is the per-share value of a fund. Market capitalization reflects a company’s equity value. AUA consists of assets that are administered, but not managed.

Why is AUM important to investors?

AUM helps assess a manager’s scale, business stability, and operational capacity. While it is not a performance metric, it is a useful indicator when considered with returns, risk, and client retention.

Can AUM be manipulated or misrepresented?

Differences in methodology (such as counting non-discretionary or advisory assets) can lead to misleading comparisons. It is important to review footnotes and request detailed breakdowns where possible.

Do fees depend on AUM?

Most asset managers charge fees as a percentage of AUM, with possible discounts at larger scales or additional performance-based fees, particularly for alternative strategies and hedge funds.

Conclusion

Assets Under Management (AUM) is a central metric for assessing the scope and business capacity of investment managers and financial institutions. While high AUM can indicate stability, scale, and professional resources, it should not be used in isolation to determine a manager’s skill or suitability. Investors and analysts are encouraged to look beyond headline figures, seeking transparency about definitions, calculation methods, and reporting policies. Combining AUM with risk metrics, historical performance, and qualitative due diligence supports a balanced and well-informed decision-making process. As the industry continues to evolve with the introduction of new asset types, regulatory developments, and shifting investor expectations, the role and interpretation of AUM will require ongoing education and careful scrutiny for sound investment analysis.