How does AUM relate to investment performance and returns?

AUM does not directly relate to investment performance or returns. AUM is simply a measure of the total value of assets that a financial institution manages on behalf of its clients. However, AUM can indirectly impact investment performance and returns in several ways:

1. Economies of scale: As AUM grows, financial institutions can benefit from economies of scale, which can help to reduce expenses and increase profits. These cost savings can be passed on to investors in the form of lower fees or better investment returns.
2. Investment strategy: A financial institution’s investment strategy may be influenced by the size of its AUM. For example, a large mutual fund company with a significant AUM may focus on investing in large-cap stocks, as it may be difficult to invest in smaller, less-liquid stocks with a large pool of assets.
3. Diversification: A large AUM can allow financial institutions to diversify their investments across a broader range of asset classes and sectors, which can help to reduce risk and increase returns.
4. Performance fees: Some financial institutions charge performance fees based on investment returns. As AUM grows, the potential for higher performance fees may increase, which can incentivize financial institutions to generate higher investment returns.

In summary, while AUM does not directly impact investment performance or returns, it can indirectly influence investment strategy, diversification, and performance fees, which can impact returns over time.