Assets Under Management (AUM) – Definition

Definition of assets under management (AUM):
The value of assets held by a fund manager, investment house or other financial institution on behalf of investors.

What is assets under management?

Assets under management, often shortened to ‘AuM’ is a financial metric which measures the total value of assets managed on behalf of investors by an investment management company.

AuM could be loosely defined as the sum of all the Net Asset Value (NAV) of each collective investment vehicle operated by a group.

Examples of collective investment vehicles include:

Assets under management therefore provides investors with an idea of the scale and relative success of an investment management company.

Fund managers with a very high assets under management are likely to have:

  • Stronger internal controls, as larger organisations will have more specialised and dedicated personnel to manage risks and regulatory compliance.
  • A larger corporate balance sheet, which may allow it to avoid bankruptcy when encountering financial difficulties compared to smaller asset managers.
  • A larger client base and a more valuable reputation. The downside cost of suffering damage to reputation is larger. This should act as a strong incentive for the manager to treat its customers fairly.

These are only general rules which will not be true for every large asset manager.

Assets Under Management (AUM) - Definition
Assets under management is a finance concept

How is the phrase ‘assets under management used’ in a sentence?

“Example asset manager group currently has £4.3bn assets under management.”

Which asset manager has the largest assets under management?

In this section, I’ll cherry-pick a few of the largest fund managers by assets under management. I am excluding banks from this list for simplicity. (Source: IPE 2018).

Blackrock – assets under management

Blackrock, a New York-based asset manager sits atop this list with a staggering $5.3tn ($5,300,000,000,000) assets under management.

Forming a large portion of these assets is Blackrock’s series of passive cheap equity ETFs branded as iShares. This investment unit was purchased from Barclays in 2009 for $15bn, and in 2019 held over $2tn of assets under management.

Vanguard – assets under management

Vanguard is another top fund pick for passive investors, thanks to its ultra-low management charges and wide range of index trackers.

Vanguard had $4.1tn in AuM in 2018, making it the second-largest asset manager in the world. This is a very impressive feat. considering that the company was only founded in 1975, so it has achieved this growth in a very short amount of time.

Vanguard has an interesting ownership structure, which sees its own funds own a part of the Vanguard group itself. The effect is that Vanguards clients – the investors in its funds – ultimately own Vanguard itself.

State Street Global Advisers – assets under management

State Street are perhaps best known for their Gold ETF – the SPDR Gold Trust.

This was the first physical gold ETF and is still the largest – with over $70 billion of gold bullion in deposit to back the value of the fund units in 2020. It remains one of the most popular ways to invest in gold using a stockbroker account.

Overall, State Street controls assets under management of $2.3tn in 2018, making it the third largest asset manager globally.

Fidelity – assets under management

Fidelity International sits fourth on our list with $2tn assets under management.

Fidelity is known for its FundsNetwork platform – a fund supermarket which allows investors access to funds from fidelity and other providers.

It is, however, a major asset manager in its own right, primarily focusing on active management. I notice that Fidelity is also a favourite of independent financial advisers in the UK.

Its active management jewel comes in the form of Fidelity Contrafund ($100bn Net Asset Value), which is at the time of writing, the largest actively managed fund in the world.

It is currently managed by William Danoff, who has held tenure as fund manager for approximately 30 years. He follows a growth investing strategy, and the portfolio holds plenty of tech stocks such as Amazon, Facebook and Microsoft.

Capital Group – assets under management

Capital Group might have a relatively generic name, but its impact on the industry cannot be understated. With $1.5tn assets under management, Capital Group appears 5th on our list.

In contrast to Vanguard, Capital Group is an ancient member of the industry, having been founded in 1931. It is owned by 450 equity partners, which comprise many of the senior fund managers.

In contrast to Vanguard, Capital Group is an ancient member of the industry, having been founded in 1931. It is owned by 450 equity partners, which comprise many of the senior fund managers.

Epic assets under management figures come with drawbacks

There are several drawbacks of funds which have $100 billion of assets under management. In summary:

Investment opportunities are strictly limited to large cap stocks.

Some fund managers have such large AuM figures, that they cannot physically invest in smaller companies, without

a) Inadvertently acquiring a majority stake in the company, triggering public take-over rules.

b) Overwhelming the market for those shares (see below)

Therefore, the largest funds may only invest in companies with very large market capitalisations, such as the larger companies in the S&P 500 or the FTSE 100.

Market prices will increase while the fund executes large buy orders.

Due to the law of supply and demand, large funds need to be conscious of the impact their orders will have on the market price.

Small investors have no impact upon market prices – as they will not exhaust all of the shares available for sale at a given offered price.

When a broker places a trade to buy shares worth $100,000,000 this will likely move the market. There may be only $3,000,000 of shares available at the best price of $2.30, and therefore the broker will need to find more sellers at higher prices in order to fully execute the trade. Depending on the liquidity of the market, this could require the price to move up to $2.40 to generate enough seller interest.

Market prices will fall while the fund executes large sell orders.

The same principle applies in reverse when funds want to exit a large position.

The highest buy offer on the market will only be for a limited quantity, forcing the broker to reduce the price incrementally until they find sufficient demand to offload every share.

Furthermore, hedge fund algorithms and day traders will also be on the look-out for large sales. They will attempt to jump in ahead of this selling volume, to profit from an anticipated fall in the market price. If they’re successful, this will further erode the recovered amount for the fund.

Not only does this result in the fund receiving ‘poorer value’ for its holdings, but where it was only partially selling a holding – it will also see a paper loss on any remaining shares it now holds, due to the lower market value.

The best investing books will assert that theory, the price dip should only be temporary as the transaction itself does not provide any new information about the prospects or value of the company.

However, due to traders using the momentum strategy, and behavioural finance in general, price falls can in practice trigger a wave of selling which further reduces the price of an instrument.

The fund will be less ‘nimble’ and unable to react quickly to market events.

Once they reach a certain size, funds become slow and sluggish. becoming an investor, able to enter and exit positions at lightning speed. They begin to resemble large whales – slow, inflexible and outmanoeuvred by smaller fish

This is one reason why hedge funds often cap the amount of inward investment they are willing to manage.

Many short term active strategies can be quickly exhausted with a relatively small amount of capital, meaning that only the smaller hedge funds will be able to continuously utilise their investor cash.

How does the definition of assets under management relate to investing?

When performing investment research, the assets under management of a fund is always a worthwhile statistic to review.

The AuM of funds can vary wildly – some funds can have an AuM of only £15m, while others can exceed 100 billion dollars.

AuM is a good indicator of the longevity of a fund – a manager is unlikely to exit or fold a fund which enjoys sustains capital inflows and increases in AuM.

A small fund may be considered a failure if it fails to attract enough investors, resulting in the fund folding and investors being returned the proceeds.

This is an inconvenience as it disrupts your investment portfolio and may leave you temporarily out of the market. Therefore I generally stay away from funds with AuM below $100 million.

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