Often when one hears about investment management companies, a term pops up - AUM. AUM is short for Assets Under Management. In the shortest explanation possible, it is the total market value of the investments that the company manages on behalf of its clients. By extension, even if a person manages investments of clients, their worth can also be estimated through assets under management. While the general rule of thumb is this, based on companies and organizations, the definition might vary slightly. Some calculations of AUM can include bank deposits, mutual funds, real estate owned, and cash in possession. While some other calculations limit the possessions to the funds/assets under discretionary management - where an investor assigns authority to a company or a person to manage or trade on their behalf.
AUM is just one of the aspects used in evaluating a company or an investment. When considering a company, along with AUM, management experience and performance are used in conjunction to estimate the worth of the entity. Realistically, investors consider higher investment inflows along with higher AUM comparisons as a measure of quality and management experience.
AUM can be classified into various pockets. It can be the total amount of assets that are being managed for all the clients or a single client. Assets under management often include the amount of capital the investment manager can use to make transactions for one or all clients. AUM will be the sum of the market value for all of the investments, managed by a fund, fund(s), fund of funds, a VC firm, brokerage company, or person registered as a portfolio manager or investment manager.
Let’s understand this from the perspective of commercial real estate. The investment firm that facilitates the purchase, sale, and ownership of real estate for investors can list such properties as its AUM. So, if there’s a warehouse that is up for lease for a total value of INR 2 crores, and there’s a commercial office space available for a lease of INR 5 crores, the total AUM of the investment firm would be INR 7 crores, irrespective of how many investors participated in the transaction. AUM can change as the market shifts as well. So, as per the market value, whatever the assets are worth is at any point in time, that will be the AUM.
As explained earlier, based on the calculation used, AUM can vary for a single entity for a number of evaluators. If an investment firm gets more investors or starts managing more assets, the AUM can change. Even the valuation of an asset in the market can cause the AUM to fluctuate. In terms of CRE (commercial real estate), depreciating rents, increase in vacancy rates, surplus supply can affect the AUM of an investment firm that deals in real estate.
Why is AUM Important
AUM is one crucial factor in deciding the growth of a company, or an individual operating as an advisor. It shows the strength of the investment experience and can be a magnificent tool to attract new investors. It is often used as a benchmark for comparing the performance of a company as opposed to its competitors. Sometimes, AUM is also used in the calculation of management fees. In such cases, the fees are charged as a percentage of the AUM. As the AUM increases, the fees per investor decrease as the percentage is reduced. This a great way to attract high-wealth investors.