What is AUM?

Assets under management (AUM) is the total market value of the investments that a financial institution or an individual manages on behalf of clients.

AUM is a measure of the size and performance of a fund, a company, or a portfolio manager.

AUM can include various types of assets, such as stocks, bonds, cash, mutual funds, and other securities.

How to Calculate AUM?

The calculation of AUM can vary depending on the type of institution and the assets involved. However, a general formula for AUM is:

AUM = Beginning AUM + Net Flows + Investment Returns

where:

  • Beginning AUM is the value of the assets at the start of a period, such as a month, a quarter, or a year.
  • Net Flows is the difference between the inflows and outflows of money from the clients. Inflows are the deposits or purchases of new assets, while outflows are the withdrawals or sales of existing assets.
  • Investment Returns is the change in the market value of the assets due to capital appreciation, dividends, interest, or other income.

Why is AUM Important?

AUM is important for several reasons:

  • AUM indicates the size and scale of a financial institution or a fund. Larger AUM means more assets to manage and more potential revenue from fees and commissions.
  • AUM reflects the performance and reputation of a fund or a portfolio manager. Higher AUM means more clients trust the fund or the manager to deliver good returns and service.
  • AUM determines the eligibility and compliance of a fund or a company with certain regulations and standards. For example, in the U.S., a fund or a company must register with the Securities and Exchange Commission (SEC) if its AUM exceeds $110 million.
  • AUM affects the fees and expenses of a fund or a service. Many funds and managers charge fees as a percentage of AUM, which can range from 0.25% to 2% or more per year. Higher AUM means higher fees for the clients, but also lower expenses as a percentage of AUM.

Example of AUM

Let’s look at an example of how to calculate AUM for a mutual fund. Suppose that the fund has the following information for the year 2023:

  • Beginning AUM: $10 billion
  • Inflows: $2 billion
  • Outflows: $1.5 billion
  • Investment Returns: 15%

Using the formula above, we can calculate the AUM at the end of the year as:

AUM = 10 + (2 – 1.5) + 0.15 × 10 = 11.5 billion

This means that the fund increased its AUM by $1.5 billion or 15% during the year.

The fund can use this information to report its performance to its clients and regulators, and to calculate its fees and expenses.

For example, if the fund charges a 1% annual management fee, it will earn $115 million in revenue from the fee.

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Summary

  • AUM is the total market value of the investments that a financial institution or an individual manages on behalf of clients.
  • AUM is calculated by adding the net flows and the investment returns to the beginning AUM.
  • AUM is important for measuring the size, performance, reputation, regulation, fees, and expenses of a fund or a company.
  • AUM can vary depending on the type of institution and the assets involved.

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