Fund manager firms continue to market thousands of new portfolios in Europe while investors pull heavy sums out of existing or “backlist” funds, suggesting the funds market is overcrowded and losing benefits of economies of scale, a report by Lipper FMI said yesterday.

New fund launches are driving a “significant proportion of European mutual fund sales”, which could damage investors’ long-term interests, the report said. The number of funds has surged by 70 per cent to about 29,000 between 1998 and 2008, but tellingly, percentage management fees have not fallen, it said.

By contrast, there are 8,000 mutual funds in the US, suggesting Europe’s market remains heavily fractured due to taxation, regulation and local buying habits. In recent years, the European Union has tried to break down national fund barriers through development of cross-border portfolios known as UCITS funds.

More than 2,500 mutual funds are launched in Europe each year, the report, entitled Profiting from Proliferation?, said.

New funds attracted more than €120 billion ($167 billion) in 2007 and 2008, whereas backlist funds saw redemptions grow from €200 billion to €500 billion – a trend suggesting considerable churn and turnover within an ever-changing spectrum of funds.

“This raises concerns as to whether mutual funds, a longer-term investment product, are being sold appropriately,” Lipper FMI said.

Ed Moisson, head of consulting at Lipper FMI, said: “New fund launches are a key business driver in European markets, particularly where banks dominate fund distribution.  Arguably this approach could damage investors’ long term interests, but the current climate offers companies the ideal opportunity to demonstrate that investors’ interests lie at the heart of the mutual fund structure.”