ASSETS UNDER MANAGEMENT

ASSETS UNDER MANAGEMENT

What does Asset Management Mean?

The management of a client’s investments by a financial services company, usually an investment company.  The company will invest on behalf of its clients and give them access to a wide range of traditional and alternative product offerings that would not be to the average investor.

What is Assets Under Management?

The market value of assets that an investment company manages on behalf of investors.

Assets Under Management (AUM) is a term used by financial services companies in the mutual fund, hedge fund, and money management, investment management, wealth management, and private banking businesses to gauge how much money they are managing.

Many financial services companies use this as a measure of success and comparison against their competitors; in lieu of revenue or total revenue they use total assets under management.

What is an Asset Management Company?

A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.

AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment.

Mutual Fund: Fund managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices.

Hedge Fund: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.

Money Management: Money management is the managing of different uses of money for different clients. It involves budgets, investments, savings, spending, and other uses of money.  . Some examples of money management are mutual funds (whether the management is active or passive), private consulting for individual clients, asset management, pension funds for companies, retirement planning for individuals, and estate planning for individuals. Money management is also called investment management and/or portfolio management, generally when referring to the professional management level.

Investment Management: The process of managing money, including investments, budgeting, banking and taxes. Also called money management.

The term asset management can be used interchangeably with investment, but asset management is more likely to be used in reference to the industry as a whole, while individual investment managers are more likely to use the term investment management to describe what they do.

Wealth Management: Wealth management is a service provided by financial institutions to help high net worth individuals protect and grow their wealth. This advanced investment advisory discipline involves providing a diverse range of services, such as financial planning, investment management, tax planning and cash flow and debt management, based on client requirements.

Wealth management services are provided by banks, professional trust companies, and brokerages.

Private Banking Business: Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizable assets.  The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a non-incorporated banking institution.

Investment in various Funds

The Clients’ Funds will be invested by an Asset Management Company in various funds.  Based on fund invested we can classify these AMCs’ in to 1. Traditional AMC and 2. Alternative AMC.

Traditional Asset Management Company is an AMC which invests the clients’ funds in traditional financial instruments such as Stock, Bonds and Money market instruments.

Alternative Assets management company is an AMC which invest the clients’ funds in various funds other than traditional investments. The broad definition makes it impossible to list all alternative strategies, but the most important areas are real estate, private equity, venture capital, commodities, and hedged or absolute return strategies. One advantage of alternative investments is the potential of high profits when stocks are under-performing, on the other hand, risks may be substantial.

Financial Instruments – Meaning:

Equity funds:

A fund which invests primarily in stock, usually common stocks.

Common stock - Securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation.

Fixed Income Funds:

Funds invested in fixed income investments, such as bonds or certificates of deposit. These funds are dependable and limit the amount of risk an investor takes on, although it could mean a lesser return that would be possible in a more risky fund. E.g. Bonds, Certificate of Deposits

Money Market Funds:

Funds invested in short-term debt obligations such as Treasury Bills, Certificate of Deposit and Commercial Paper etc.

Bonds - A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

Treasury bills – Short-term (usually less than one year, typically three months) maturity promissory note issued by a national government as a primary instrument for regulating money supple and raising funds via open market operations. A Treasury Bill does not pay interest. They are sold at a discount and the holder will receive full face value upon maturity.

Certificate of Deposits – A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions.

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

Commercial Paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

Real estate Funds: A regulated investment company that specialized in owning securities offered by real estate-related companies, including REITs real estate development and management companies and homebuilders.

REITs: A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

Private Equity and Private Equity Funds:

Equity securities of companies that are not listed on a public exchange.  Money invested in firms which have not gone public’ and therefore are not listed on any stock exchange.  Private equity is highly illiquid because sellers of private stocks (called private securities) must first locate willing buyers.  Investors in private equity are generally compensated when: (1) the firm goes public, (2) it is sold or merged with another firm, or (3) it is recapitalized.

Private Equity Fund:

A fund which invest its money in private equity, often in attempts to gain control over companies in order to restructure the company.  When the fund gains control of a company, they will usually take the company off the market if it isn’t private already, go through a multi-year restructuring process, and then relist the company on the stock market.

Venture Capital and Venture Capital Fund:

Venture Capital: Venture capital is financing provided by wealthy independent investors, banks, and partnerships to help new businesses get started, reach the next level of growth, or go public.

In return for the money they put up, also called risk capital, the investors may play a role in the company's management as well as receive some combination of equity, profits, or royalties.

Private financing used to fund a new business; in other words, money provided by investors to start-up firms and small businesses with perceived long-term growth potential. This is a very important source of funding for start-ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Venture Capital Fund: A pooled investment that uses the money from third-party investors, such as investment banks or wealthy investors, to invest in business projects.  Businesses that seek venture capital often carry more risk, and are either unwilling to pay the interest on bank or market loans or are unable to obtain them.

Commodity and Commodity Fund:

Commodity:

A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across the market. E.g. Petroleum, copper.

Commodity Fund: These funds are true commodity funds in that they have direct holdings in commodities. For Example, a gold fund that holds gold bullion would be a true commodity fund.

Nature Resource Funds: Funds that invest in companies that are engaged in businesses that operate in commodity-related fields, such as energy, mining, oil drilling and agricultural businesses, are often referred to as natural resource funds. While they often hold neither actual commodities nor commodity futures, they provide exposure to the commodities markets by proxy.

Absolute Return: 

The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital.

The return that an asset achieves over a certain period of time.

CLO - Collaterized Loan Obligation: A debt security backed by a pool of commercial loans.

An asset-backed security backed by the receivables on loans. Banks package and sell their receivables on loans to investors in order to reduce the risk coming from loan defaults. Returns on CLOs are paid in tranches; that is, individual loans backing CLOs have different maturities and investors are paid out according to their level of investment. Banks offer higher interest rates to investors willing to buy CLOs backed by higher-risk loans. From a bank's perspective, in addition to reducing risk, CLOs also reduce their capital requirements by raising funds through the issue of CLOs.

Publicly-Traded Closed-End Mutual Funds: A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Clients

Two types of AUM breakups are observed on clients’ basis.

1. Based on Client Type: Institutional clients, Retail Clients, HNW Clients.
2. Based on Client Domicile: E.g. US, Canada

Institutional Client: Institutional clients are defined both in terms of size and nature. In general, they tend to be large corporations in any line of business.  They also normally include other financial services firms of any size.

Larger clients are called institutions.

Retail Client: In the financial services industry, the definition of retail clients usually includes individuals, families and small businesses.

Note that clients defined as retail can include very wealthy individuals and rather successful small businesses.

High Net Worth Individual (HNWI): A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment accounts instead of regular mutual funds.

A high net worth individual is a person with large personal financial holdings. Traditionally the term used was millionaire, but in recent years the term high net worth individual has become the descriptor of choice.

AUM based on Fee Earning

Fee generating AUM: Fee-Earning Assets Under Management refers to the assets managed on which management fees are derived.

Fee generating assets are those on which we earn management fees and monitoring fees from our structured portfolio vehicles. (Apollo Management, L.P.)

“Fee-earning assets under management” refers to the assets we manage on which we derive management fees. (The Blackstone Group)

Non-Fee generating AUM:

Non-fee generating assets include, but are not limited to, the net of the funds’ fair value above and below invested capital. (Apollo Management, L.P.)

Movement in Assets Under Management

One more presentation we come across our research is Movement in Assets Under Management. This statement presents the value of total inflows and outflows during the reporting period, appreciation or depreciation in the value of assets under management and other adjustments during the period. In some case, net flows information is also available in the statement.

The general presentation pattern is as below:

  

The difference between two AUM balances consists of market performance gains/ (losses), foreign exchanges movements, net new assets (NNA) inflow/ (outflow), and structural effects of the company, such as acquisitions.

Opening and Ending Assets Under Management: Represents total market value of assets under management as of the date.

Inflows: These are the new funds from the clients during the period. Capital Raised, Sales, Subscriptions are other line items used in the statement.

Outflows: Outflows represents the funds withdrawn by the clients during the period. Redemptions, Distributions are other line items used in the statement.

Net flows: Consist of total client asset inflows, less total client asset outflows.

Client asset inflows include interest and dividend payments and exclude change in client assets due to market fluctuations.

This indicates the total net new flows during the reporting period.

Also called as Net New Flows, Net New Assets, and Net New Clients. 

Market Appreciation (Depreciation):

This is the adjustment to the value of assets under management due to market fluctuations.  It may be an increase of decrease.

Other Adjustments: These are the adjustment made to the assets under management other than the above.

Translation adjustments, Acquisitions/Dispositions, Equity Buy Back, De-risking are some of the line items.

Movement in Mutual Funds Under Management

In international companies we have observed statement of movement in mutual funds under management.

Average Assets Under Management

The average asset under management reflects the total AUM through out the period. It may be a Weighted Average AUM or a simple Average AUM.

The average assets under management during the period, along with the average margins achieved, determine the level of management fee revenues.

  

Client Assets

Client assets is a broader measure than assets under management as it includes transactional and custody accounts (assets held solely for transaction-related or safekeeping/custody purposes) and assets of corporate clients and public institutions used primarily for cash management or transaction-related purposes.

Client Assets includes assets under management, assets under administration, and assets under custody.

Assets Under Custody: AUC is the value of assets held under custody by a "custodian of securities". Custody refers to Care, supervision, and control and legal responsibility for someone else’s assets.

Brokerage Assets:  Represent assets on which company is earning brokerage fees.

Some stock owners give their brokers power of attorney to make decisions about when to buy or sell stock and depend upon their brokers for researching new stock for purchase. Brokerage firm usually assesses a fee for this service and regardless of whether the owner loses or earns money, the firm is paid.

Other brokerage firms are employed by people who like to do their own research and make all their own decisions about what and when to buy and sell.  These firms have a tendency to charge per transaction and can be quite reasonable to employ.

Assets Under Administration: Represent client accounts in Wealth Management. Investment decisions, either at the strategic or tactical levels, are made by the account owners.

Assets under Supervision: Represent assets under management as well as custody, brokerage, administration and deposit accounts.