Funds under management

What Is Funds Under Management?

Funds under management (FUM), often referred to as assets under management (AUM), represents the total market value of all financial assets that a financial institution or investment manager manages on behalf of its clients. This metric is a cornerstone of the asset management industry, belonging to the broader category of investment metrics within financial services. Funds under management can include a diverse range of assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), private equity, and other structured products. The size of an institution's funds under management is a key indicator of its scale, influence, and market presence.

History and Origin

The concept of pooling assets for investment purposes has historical roots going back centuries, with early forms of investment trusts appearing in the Netherlands in the 18th century. Adriaan van Ketwich's "Eendragt Maakt Magt" (Unity Creates Strength) trust in 1774 is often cited as an early precursor to modern investment funds, emphasizing diversification for investors with minimal capital.

In the United States, the modern mutual fund emerged in 1924 with the creation of the MFS Massachusetts Investors Trust. As these pooled investment vehicles grew in popularity, the need for regulation became apparent, especially after the stock market crash of 1929. The Investment Company Act of 1940 and the Investment Advisers Act of 1940 were landmark pieces of legislation that established a regulatory framework for investment companies and investment advisers, respectively.²⁰, ²¹ These acts mandated disclosures and aimed to minimize conflicts of interest, laying the groundwork for how funds under management are reported and overseen today.¹⁹ The Investment Company Institute (ICI) has since 1960 published the Investment Company Fact Book, serving as a comprehensive source of data and trends in the U.S. investment fund industry, tracking the growth of funds under management across various fund types.¹⁶, ¹⁷, ¹⁸

Key Takeaways

• Funds under management (FUM) represents the total market value of assets managed by an institution for its clients.
• FUM is a critical measure of an investment firm's size, influence, and operational scale within the financial industry.
• The growth or decline of FUM can reflect market performance, investor confidence, and the firm's ability to attract and retain clients.
• FUM is often used to calculate management fees, which are typically a percentage of these assets.
• Regulatory bodies often use FUM thresholds to determine registration and oversight requirements for investment advisers.

Formula and Calculation

Funds under management (FUM) is not calculated using a complex formula but rather by summing the market value of all assets managed by a firm. It is a direct aggregation:

Where:

• (FUM) = Funds Under Management
• (MarketValue_i) = The current market value of individual asset (i) within the managed portfolio.
• (n) = The total number of assets managed.

This calculation is performed continuously, with the value fluctuating based on market performance of the underlying securities and client activity (inflows or outflows of capital). For instance, if a portfolio consists of various types of asset classes, the FUM would be the sum of the market value of all holdings within those classes.

Interpreting the Funds Under Management

Funds under management provides a snapshot of a financial institution's size and reach. A higher FUM generally indicates a larger and potentially more established firm, which can offer certain advantages such as greater resources for research and development, potentially lower operating costs due to economies of scale, and broader brand recognition.

For investors, a firm's FUM can be an indirect indicator of its popularity and success in attracting capital. However, it's crucial to understand that a large FUM does not inherently guarantee superior investment performance. While it suggests a firm has gained significant investor trust, performance is determined by the skill of portfolio managers, the efficacy of their investment strategies, and overall market conditions. Investors should consider FUM alongside other factors like fee structures, historical performance, and the firm's investment philosophy.

Hypothetical Example

Imagine "GrowthPath Investments," an asset management firm. At the start of the year, GrowthPath has a total of $500 million in client assets under management across various funds.

Throughout the year, the following events occur:

• Market Appreciation: The stocks and bonds held within GrowthPath's portfolios collectively increase in value by 10%, adding $50 million to the FUM.
• New Client Inflows: GrowthPath attracts new clients who invest an additional $75 million into its funds.
• Client Redemptions: Some existing clients redeem a total of $25 million from their accounts.

To calculate GrowthPath's new funds under management:

1. Beginning FUM: $500 million
2. Add Market Appreciation: + $50 million
3. Add New Inflows: + $75 million
4. Subtract Redemptions: - $25 million

New FUM = $500 million + $50 million + $75 million - $25 million = $600 million

At the end of the year, GrowthPath Investments now has $600 million in funds under management, reflecting both market movements and client capital flows. This metric helps GrowthPath assess its growth and informs its strategic planning, including decisions about expanding its product offerings or adjusting its fee structures.

Practical Applications

Funds under management is a fundamental metric with several practical applications across the financial industry:

• Fee Generation: Investment firms typically charge management fees as a percentage of funds under management. This is the primary revenue stream for many asset managers.¹⁵ For example, a firm might charge an annual fee of 0.50% on FUM. As FUM increases, so does the firm's revenue, assuming the fee structure remains constant.
• Regulatory Oversight: Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), use FUM thresholds to determine registration requirements and the level of oversight for investment advisers. For instance, investment advisers with at least $100 million in "regulatory assets under management" are generally required to register with the SEC.¹³, ¹⁴
• Industry Benchmarking: FUM is widely used to rank and compare the size and scale of different asset management firms. This allows for benchmarking against competitors and provides insights into market share and industry consolidation. Industry reports, such as those published by the Investment Company Institute, frequently highlight FUM trends.¹¹, ¹²
• Performance Analysis: While not a direct measure of performance, changes in FUM over time can indicate investor confidence and the success of a firm's investment strategies. Significant net inflows suggest that clients are satisfied with the returns and services provided.
• Business Valuation: For potential mergers, acquisitions, or IPOs, a firm's funds under management is a key determinant of its valuation. A larger FUM often translates to a higher valuation due to the recurring revenue stream it generates.

Limitations and Criticisms

While funds under management is a widely used and important metric, it has certain limitations and faces criticisms:

• Not a Direct Measure of Profitability: A large FUM does not automatically equate to high profitability. Firms with substantial funds under management may still face pressure on their profit margins due to intense fee competition, rising operating costs, and increasing regulatory burdens.⁹, ¹⁰ The shift towards lower-cost passive investment products, such as index funds and ETFs, has put downward pressure on management fees, affecting the revenue generated from FUM.⁷, ⁸
• Market Volatility: FUM can fluctuate significantly due to market movements, even without any change in client capital. A sharp market downturn can cause FUM to decrease, impacting a firm's revenue, even if its relative performance is strong. This reliance on market performance introduces a degree of unpredictability to revenue streams.
• Excludes Performance Metrics: FUM alone does not provide insight into the quality of investment performance or risk management. A firm might have a large FUM but consistently underperform its benchmarks, which could eventually lead to client redemptions.
• Focus on Quantity Over Quality: The emphasis on growing FUM can sometimes incentivize firms to prioritize asset gathering over achieving superior risk-adjusted returns for clients. This can lead to the proliferation of new, sometimes undifferentiated, products simply to attract more capital.
• Fee Pressure: The asset management industry is under increasing pressure to reduce fees, largely driven by the popularity of low-cost passive investments and greater scrutiny from investors and regulators. This means that even with growing FUM, a firm's revenue per dollar managed might decline.⁶

Funds Under Management vs. Regulatory Assets Under Management

While often used interchangeably in casual conversation, "funds under management" (FUM) and "regulatory assets under management" (RAUM) have distinct meanings, particularly in a regulatory context.

The key difference lies in the purpose and definition. FUM is a broader, internal metric representing everything an asset manager oversees. RAUM, conversely, is a specific calculation mandated by regulatory bodies like the SEC to determine if an investment adviser meets certain thresholds for registration and ongoing compliance. For instance, an investment adviser generally needs to register with the SEC if they have at least $100 million in RAUM.¹, ² This distinction is crucial for legal and compliance purposes within financial regulation.

FAQs

What types of assets are included in funds under management?

Funds under management typically include a wide array of financial assets, such as cash, stocks, bonds, mutual funds, exchange-traded funds, hedge funds, private equity investments, and other alternative investments that an institution or manager oversees on behalf of clients.

How does funds under management affect an investment firm's revenue?

An investment firm's revenue is directly linked to its funds under management because management fees are commonly charged as a percentage of these assets. The higher the FUM, the greater the potential revenue for the firm, assuming a consistent fee schedule.

Is a high funds under management always a good thing for investors?

Not necessarily. While a large FUM can indicate a firm's stability and resources, it doesn't guarantee superior investment returns or client satisfaction. Investors should also consider factors like historical performance, fee structures, and the alignment of the firm's investment philosophy with their own financial goals. A higher FUM can sometimes lead to challenges in deploying capital effectively, a concept known as "diseconomies of scale."

What is the difference between funds under management (FUM) and assets under management (AUM)?

The terms "funds under management" (FUM) and "assets under management" (AUM) are largely interchangeable in practice and refer to the same concept: the total market value of assets that an investment firm or financial institution manages for its clients. There is no substantive difference in their meaning or application.

How do market fluctuations impact funds under management?

Market fluctuations directly impact funds under management. When the value of the underlying assets in a portfolio increases due to positive market performance, FUM rises. Conversely, a decline in market values will reduce the FUM, even if there are no client inflows or outflows. This sensitivity to market volatility is a key characteristic of FUM.