Denham confronts stocks dilemma

Aviva Investors European equity manager Mark Denham faces a “dilemma” after ramping up the number of holdings in his portfolio and reaching his stock limit.

The manager of the Aviva Investors European Equity fund said he was in a quandary as he wanted to invest in even more companies, but had run up against the vehicle’s restrictions.

Mr Denham, who has been running the £154.3m fund for more than three years, has increased the number of stocks from 55 to 75.

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His move comes in stark contrast to the trend across the asset management industry for managers to build more concentrated portfolios, which has been seen as a reaction to investors looking for truly active managers in the face of the rise of passive investing.

Mr Denham explained his stock increase was not a top-down strategy for changing the profile of the fund, but was instead due to the surge in European initial public offerings (IPOs) since 2009.

Last year there were 279 IPOs on European stock exchanges, an 11 per cent increase from 2013, according to the Experian IPO Transactions 2014 paper.

The manager said: “I didn’t increase the number of stocks so I could diversify my holdings, I just liked more of the new companies.

“The problem is I am at my limit now in terms of the holdings I’d like to have and I don’t really want to sell any of these stocks.”

One sector that has caused Mr Denham a particular “dilemma” has been his favoured healthcare sector, which takes up 33.4 per cent of his fund.

He said it would be easy for him to increase his weighting to the sector as there were many more stocks that interested him.

However, he acknowledged he did not want to spread himself too thin or give too much to one sector, even though he recently added a new healthcare name to the portfolio, in French pharmaceutical firm Sanofi.

Mr Denham said additions to the portfolio would be few and far between in the coming year as he would have to focus on the “prioritisation of stocks”, since he did not expect the IPO market to slow down anytime soon.

“We’ve been spending at least half, if not three quarters, of our time looking at new businesses,” he said.

“We like one in five that come across our desk, but then only invest in about one in 10.”

Rather than working against Mr Denham, the increased diversification since he took on the fund has helped take it into the top quartile for performance in the IA Europe excluding UK sector.

It has since delivered 67.2 per cent, outperforming the sector average return of 58.1 per cent.

Performance has been even better in the past year, as the vehicle’s 9.4 per cent return has put it top decile in the sector, more than tripling the average fund’s return of 2.9 per cent.