A Guide To Assets under Management (AUM)

“Mutual fund managers want your money in their funds. They get paid based on assets under management. “

-Barry Ritholtz

 

 

What are Assets Under Management?

 

Assets under management, in short AUM is about the quantity of money that hedge funds, financial institutions and mutual funds manage. This management is for the clients. It can be done by the venture capital firms, any brokerage company or even an individual registered advisor.

 

The definition of Assets under management varies from company to company. Multiple formulas can be used to deduce the total market value of investments. Like in the case of some financial institutions while calculating AUM, mutual funds and deposits are added.

 

While evaluating any company or investments, Assets under Management is only one of the criteria. A high AUM is a strong and positive indicator of overall quality and management experience.

 

Like earlier stated, different companies have different definitions of AUM. For some it is the total of all assets of all the clients while others use it as total assets of an individual client. Let us take an example.

 

If any investor has $40,000 in mutual funds, then this amount is included in the AUM. Now the manager can use the funds in AUM to buy/sell shares without taking any approval. From this example we get two things:

 

Number 1: Fund Managers can use AUM to make transactions. 

 

Number 2: Each investment is included in the AUM fund pool.

 

Also Read | Best Mutual Funds to Invest

 

 

Key Findings By PwC w.r.t Global Assets under Management

 

According to PwC there are three areas in which every company should act. 

 

1. Every asset and wealth manager should focus on the fact that he will face success and failure both. In business if you have to expand and get more profit then you have to cut costs in some areas.

 

2. Every organization should understand that this is the era of technology and it is important to embrace it. Win or loss of every organization depends on whether you are upfront with the changes or not.

 

3. Different skills are needed to take the business to the next level.

 

Keeping all these three areas in mind, every organization involved in trade and finance should embrace all the technological changes that can help them grow and flourish in future. A study conducted by PwC on AUM gave the following results:

 

• By 2025, Assets under Management will be doubled. We will witness a rise of around 6.2% every year. In 2016 it was US$ 89.6 trillion and by 2025 it will be US$ 145.4 trillion. Asia Pacific and Latin America will see the fastest growth in AUM.

 

• Active Management will grow and reach US$ 87.6 trillion, which is 60% of the total Global AUM. But most importantly the Passive Management will also witness a growth and reach US$ 36.6 trillion i.e. 25% of the Global AUM.

 

• Private Equity & Debt, real assets will also grow more than double. They will reach US$ 21.1 trillion in 2025 i.e 15% of the Global AUM.

 

• Industries that are involved in trade finance, infrastructure and P2P lending will also grow dramatically.

 

Importance of Assets under Management

 

Assets under Management helps to develop a steady market value of the company. It is a vital market tool that is used to attract potential customers. It also helps to increase the overall credibility of the firms, which in turn will get them more clients.

 

With the help of the assets under management we can analyze the capitals of the firms and take core investment decisions. We can also decide which assets performed well and which under performed in the market. Assets showing higher return shows the efficiency of the investment firms and vice-versa.  

 

Effect of Fee charged on Assets under Management

 

Every house charges a fee as per the size of the funds which is called the management fee. The performance of the fund has no impact on the fees that are charged. It is just to cover all the administration costs and the compensation of the manager for the efforts done by him.

 

The total expense ratio is the cost used to operate funds. As per the Securities Exchange Board (SEBI), the AUM should always be higher than the Total Expense Ratio.

 

Reasons of Changes in Assets under Management over time

 

There are 3 main reasons because of which Assets under Management changes. Let us look at them.

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Reasons why Assets under Management change over time

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1. Inflows and Outflows of Funds

 

Investors can change the amount of funds they have invested in mutual funds anytime they want. They can buy new shares or sell the existing shares. It causes a big change in the size of the assets under management. It changes the inflow and outflow of funds.

 

 

2. The value of security in which AUM is invested

 

Assets under Management means the total market value of assets. If the market value fluctuates then the composition of Assets will automatically change. It is one of the reasons why there are constant changes in the value of Assets under Management. 

 

There can be an upward shift in the value of assets or decline in the value of investments. Whatever the case is, the value of AUM will change.

 

 

3. Number of Dividends Paid

 

The number of dividends that companies paid will affect the assets under management. In case these funds received out of dividends are reinvested then the compositions will change. 

 

Likewise if these dividends are distributed then also the overall composition will change. It is also one of the reasons why the assets under management changes.

 

These are some additional reasons that also affect the volatility of the Assets under Management. Here are the examples of how:

 

1. A fund that has fast inflows and outflows will be high in volatility in its Assets under Management.

 

2. A fund that has high volatility will show more fluctuations in the assets under management rather than a stable security.

 

Liquidity of the funds can also be a reason for volatility in Assets under Management. Here is how:

 

1. The assets that are not liquid or very less liquid cannot be traded. If they are not traded then they will have no impact on the assets under management. Whereas, assets that are liquid will create a frequent impact on the assets under management.

 

2. Securities that are private may not be in the market very often for trading. Therefore, they will have little or no impact on the assets under management.

 

Also Read | Difference between Economic Value and Market Value

 

Top 6 Companies involved in Assets under Management

 

There are many companies across the globe that are involved in Asset Management. Below are the top 6 ones. The rankings are done based on the amount of Assets under Management they have. The amounts are as per their Balance sheet of February 2022.

 

1. BlackRock

 

Founded in- 1988

Assets under Management- $9.464 trillion

 

It is not only the largest Assets management company but also one of the largest Financial Institutions in the world. It went public after 1 year of its formation i.e. 1999.

 

When it was founded its main domain was just risk management and fixed income asset management. But now it has widened the scope. The CEO of BlackRock is Larry Fink.

 

Its subsidiaries are Aperio Group, LLC and some others. It is constantly making headlines for the tremendous job it is doing in the asset management sector. It is operating as a solo business segment till now.

 

2. The Vanguard Group

 

Founded in- 1975

 

Assets under Management-  $8.4 trillion

 

It is famous for its strategy in passive investment. It means that the money is invested in mutual funds such that it mirrors a specific index. 

 

Apart from asset management, The Vanguard Group offers services of brokerage, financial planning, annuities and others. Moreover, it has a very low expense ratio for its funds.

 

The founder of this group is John C. Bogle and the CEO is Mortimer J. Buckley. Some of its subsidiaries are JustInvest LLC, Vanguard Fiduciary Trust Company etc. Currently it has more than 17k employees and is a registered investment advisory in America.

 

3. UBS Group

 

Founded in- 1988

Assets under Management-$4.432 trillion

 

The UBS Group has 4 different divisions operating across the globe. The division located in Switzerland is the “true global asset manager”. It offers both asset and wealth management services.

 

It is a Swiss multinational bank with its co-headquarters in Zürich and Basel. It is also one of the largest private banks in the whole world. The CEO of UBS Group is Ralph Hamers. Currently it has more than 70k employees. UBS Asset Management, UBS Switzerland AG etc are some of its subsidiaries.

 

4. Fidelity

 

Founded in- 1946

Assets under Management-$4.23 trillion

 

Fidelity is a discount broker and an asset manager. Till now it has more than 30 million clients. It is as per the 3rd quarter of 2021. For individual investors. Fidelity provides an online platform to buy and sell securities.

 

It also manages the portfolios of the clients. In 2018, Fidelity made the headlines because it was offering mutual funds with ZERO expense and minimum investments.

 

The CEO is Abigail Johnson since 2014. Some of the subsidiaries of Fidelity include- Colt Technology Services, Strategic Advisors LLC etc. Along with investment services it also offers retirement expertise to its clients.

 

5. State Street Global Advisors

 

Founded in- 1792

Assets under Management- $3.86 trillion

 

State Street Global Advisor is a subsidiary of the State Street Corporation. It is based in Boston. It also manages clients including non-profits, associations, local as well as global.

 

It is an American Financial services company and also the second oldest operating bank in the United States. As per 2020, it has more than 39k employees.

 

The CEO of the company is Ronald P.O. Hanley. Some of the main competitors of State Street Advisors are BlackRock, UBS, Citi, Wells Fargo and even Brown Brothers Harriman.

 

6. Morgan Stanley

 

Founded in- 1935

Assets under Management- $3.274 trillion

 

JP Morgan and Drexel Group together formed the Morgan Stanley Group on Wall street. Currently it has more than 68k employees and is present in around 42 different countries.

 

In the late 2020s it adapted e-trade services. It is an American Multinational Financial Service Company in New York. The CEO of the company is James P. Gorgan. Eaton Vance is one of the subsidiaries of Morgan Stanley.

 

The main purpose of this company is to help the government, individuals, corporations as well as institutions to mobilize the funds in order to meet their financial goals.

 

Also Read | Liquid Funds

 

Assets under Management helps the financial institutions reach their full potential and in turn these institutions support the investors to raise capital for their needs.