The European Fund and Asset Management Association (EFAMA) has challenged the commonly held belief that fund consolidation will significantly lower the cost of funds in Europe, in its 20th issue of its Market Insights series, titled 'Beyond fund consolidation: a more promising strategy for bigger funds and faster cost declines in Europe'.

In a statement today (20 February), the watchdog said the report compared the size and number of equity UCITS with that of US equity mutual funds.

Among its key findings there were 10,281 equity UCITS in Europe in 2023, compared to just over half that in the US. This is due to US funds predominantly being sold domestically, while UCITS are marketed across the EU and globally, requiring a diversity of funds tailored to local needs.

The average fund size was much smaller in Europe, €501m compared to $3.5bn in the US.

While the number of funds has declined in many EU countries, significant fund consolidation across Europe is hindered by various barriers, including tax treatment, regulatory divergence, local distribution agreements, language, etc.

Even in the unlikely event that Europe reduced the number of equity UCITS to US levels, the average fund size would only rise to €962m, EFAMA said, adding that this still falls far short of the US equity fund average of €3.1.bn.

Fostering the growth of UCITS assets, instead of focusing on fund consolidation, would help lower the cost of funds while also benefitting EU capital markets, it further argued.

Bernard Delbecque, senior director, Economics & Research at EFAMA, said: “Most comparisons with the number of US mutual funds are misleading because they do not compare like with like. Unlike US mutual funds, UCITS can be distributed domestically, across the EU, or internationally.

"Therefore, the fact that there are twice as many equity UCITS as US equity mutual funds is not surprising and should not be viewed per se as a sign of market inefficiency. US mutual funds are much larger than UCITS because of the larger pension saving market over there. Europeans still rely too much on ‘pay-as-you-go’ first pillar pensions. We need to encourage much more occupational and private pension savings if we want the size of UCITS to go up and the cost to come down.”

EFAMA’s director general, Tanguy van de Werve, said: “If policymakers want to strengthen EU capital markets, boosting investment levels is a much more promising strategy than encouraging fund consolidation. We hope the upcoming European Savings and Investments Union will prioritise this by addressing the core issues, including pensions, tax incentives and financial literacy."