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What is AUM? (Assets under management), and what you should know



What is AUM?

In the world of finance, AUM is one of the most common and important terms you will hear. First of all, what does AUM stand for? It stands for “assets under management”, and it describes the total value of all of the assets and investments held by a fund or financial institution.

But what is asset management? It is the current and real-time market value of a collection of assets being managed by an investor or vehicle such as a venture capital fund or a mutual fund. Knowing the AUM definition is essential for any first-time investor or trader. Here’s why. What is the meaning of assets under management? So, what is AUM all about? The assets under management definition is the market value of the assets that an institution, fund, or individual is managing for clients. It also describes the total market value of those assets and the returns that a fund has made on its investment.

In its simplest form, AUM is a number that denotes the current total value of all assets held. There are many ways to calculate AUM and it is important to note that there is no “standard” AUM calculation, as the preferred method differs from country to country and from business to business.

Why is AUM important? So, what does AUM mean? To traders, investors, beginners, and asset managers alike, AUM is important for a number of reasons. For one, AUM affects your returns directly. A higher AUM in a fund leads to higher income for the asset manager since they get a percentage from the total AUM. In addition, there are a number of more fundamental reasons why AUM is important to investors:


Psychological


Traders with low levels of AUM tend to be less attractive to investors since a higher AUM indicates a higher number of investors which is reassuring. Generally, we tend to think a higher AUM indicates a more experienced asset manager for the fund.


Strategic


Meanwhile, a higher number of AUM tends to mean that a fund is sufficiently diversified to offset a certain amount of risk. In turn, the larger AUM allows the asset manager to continue investing in more diverse assets, which may serve to lower the volatility of a fund further.


Financial


With any fund, the asset managers tend to be compensated with a percentage of the number of what is outstanding. In this instance, the AUM, meaning that a higher number means a bigger payday.


Technological


Artificial intelligence plays an increasingly central role in investment and fund management strategies. An increase in AUM means a larger budget in this regard.


How to calculate assets under management


So, how do you calculate assets under management? It is first important to consider the actual assets that are in the fund or institution. This will include stocks, cash, bonds, and other non-physical financial assets. You might also be wondering, are assets under management on the balance sheet? The answer is often “no”, because AUM takes into account a number of assets managed solely on behalf of clients that may not appear on a corporate balance sheet.


Rather than working this out yourself, you will usually be able to get a ballpark figure of a fund’s AUM by looking at the prospectus or an official document such as an SEC or IRS filing. Note that the total value of AUM will change on a daily basis, as assets appreciate and depreciate and investments flow in various directions.


There are several factors that can increase a fund’s AUM, including:


Dividends


If dividends are reinvested after being paid out, then the value of the AUM will increase.


Asset performance


If assets such as stocks perform well, this will instantly boost the overall value of the total AUM.


New customers


As new clients join a fund, they are investing more money into it. The result is that the overall “pie” grows, increasing the total AUM.


Meanwhile, certain factors can lead to a decrease in the total value of a fund’s AUM, such as:


Fewer investors


If investors are not satisfied with a fund and begin to pull out, then the cash flow will drop, and the AUM will quickly fall.


Losses in performance


If assets such as stocks and bonds perform poorly, the aggregate effect will be that the value of AUM will decrease.


Fund closures


If a fund is seeing poor demand or poor performance, an asset manager might take the decision to close that fund, which would eliminate the AUM entirely.


Which funds have the highest AUM? Generally, asset managers and institutions in the US and UK tend to be the largest in terms of AUM, and the most heavily subscribed. There are the largest outright institutional asset managers in the world, such as Vanguard and Blackrock, which collectively manage trillions in AUM.


Such large institutional managers are involved with a very diverse array of assets, including stocks, bonds, commodities, exchange-traded funds (ETFs), and more. There are also well-known asset managers with decades of experience such as Warren Buffet and Charlie Munger, who effectively manage hundreds of billions of dollars in their respective portfolios.

With these funds, it is also possible to invest in (ETFs) to help diversify and grow your portfolio.


Tips for increasing your assets under management


Perhaps you are an ambitious investor looking to increase your own assets under management and build a sustainable, profitable portfolio. If so, you might have something to offer less experienced investors. By joining eToro’s Popular Investor Program, you can let other traders and beginners copy your own investments and make a profit every time someone copies from you. This can help you grow your profits while helping others do the same.


For more tips on how to increase your own AUM, let’s consider one of the world’s largest financial institutions, BlackRock. BlackRock assets under management currently total around $8.6 trillion, a figure that has grown consistently for years. There are a number of strategies that we can learn from BlackRock, such as:

  • Have a clear vision: You need to know exactly what you are trying to do and has a clear mission statement and agenda. Clients know what they are buying into.

  • Be professional: An excellent global reputation for professionalism, competence, and honesty is key for success.

  • Define your marketing strategy: A well-honed marketing strategy can help cement your reputation as a market-leading institution.

  • Set clear goals and stick to them: A crystal-clear vision and an ability to set detailed quarterly goals and priorities are essential.

  • Be transparent with investors: Always go to great lengths to ensure transparency and emphasize that you will never deceive investors.


Conclusion

In the world of investment, AUM tells you a lot. It tells you about the value of a fund, where that fund is heading, and why it is attractive. If you want to practice trading and investing with high AUM funds without risking your own capital, eToro’s demo account can help you refine your approach.


With thanks to our broker etoro for the content.


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