As a beginner learning how and where to investment money in Singapore, you will come across this term ‘asset under management’ frequently. However, what is Asset Under Management and how is it different from total Assets?

Who uses Asset under Management?

Many investment management firms use the term. This can include real estate companies such as REITs, Hedge funds and traditional investment firms.

Why use Asset under Management?

These firms use asset under management as their business model often works on a fee structure where they charge their clients a fee for the assets that they help their clients to manage. These clients can range from their parent company, to high net worths to pension and insurance funds. As it is a fee based revenue structure, knowing how much Asset under Management a firm has provides key insight into how big its revenue base is.

However, do note that knowing how big the revenue base is does not tell us all there is to know about the quality of the earnings. This is because, management may not share the fee charges with investors. For example. charging a 2 and 20 on a 100 million hedge fund is different from a 2.5% management fee on a 100 million dollar property.

Is Asset under Management the same as Total Assets

AUM is not the same as Total Assets. As the name suggest, AUM is about the Assets that the firm is charging their clients a fee on. For a Real Estate Investment Trust, it will refer to the properties that they manage whereas for a Fund management house it will be the cash or investment holdings that their clients have entrusted them to manage. However, these assets are not the only assets of the firm as they do have other assets that they have acquired with internal cash sources.

Is larger AUM always better? 

From the perspective of the investment management business, a larger AUM will always definitely mean more revenue and thus better business. However, it may not necessarily be a good thing as too large an AUM can in effect lower the investment performance. To illustrate this, assume that every opportunity in the market is approximately 10 million in size. Further assume that you are working with a 100 million fund. In that case, any successful opportunity will roughly translate into 10% return for your fund. However, if the fund’s AUM increases to about 1 Billion, then a 10 million opportunity will only translate to a 1% return. If there are only 4 of such opportunities available every year, having too large an AUM can mean that the fund will never be able to get above 5% annual return. In short, larger AUM is not always better as the size must be optimal relative to the opportunities that are available.