Mike Clements and Pras Jeyanandhan, fund managers of Downing Fund Managers' VT Downing European Unconstrained Income Fund, recently sat down with Proactive's Thomas Warner to discuss challenges and opportunities in the European investing climate.
How has the fund adapted to rising geopolitical tensions and volatile macroeconomic conditions? Let’s find out.
Thomas Warner (TW): Mike, could you start by reminding us about the fund and its focus?
Mike Clements (MC): Yes, thanks, Thomas. The fund is straightforward. It invests in Europe and the UK, is concentrated and unconstrained, designed to look across the whole market, from large to very small companies, seeking the best opportunities at any given point in time.
TW: Pras, given the recent market volatility, inflation concerns, and geopolitical tensions, how are these factors influencing your investment approach?
Pras Jeyanandhan (PJ): The markets have been volatile, influenced by investor fears around stubbornly high inflation and geopolitical risks, such as events in Russia, Ukraine, Israel, and Palestine. However, this volatility is presenting us with opportunities, especially in big multi-year structural themes like the energy transition.
TW: Can you provide specific examples of these opportunities?
PJ: We’re very interested in the energy transition and are finding opportunities amidst short-term volatility caused by supply chain issues and wage inflation. These stocks are under pressure but present very interesting long-term opportunities that we’re looking to take advantage of.
TW: Mike, where is your focus amidst these market conditions?
MC: We’re focused on big structural themes like the energy transition and the growth in data. We’re invested in Munters, a Swedish industrial company founded in the 1950s. Munters plays a pivotal role in both data growth and battery growth. It provides equipment that dries the air in big giga factories essential for battery manufacturing, given lithium’s reactivity to moisture. Additionally, with the explosion of data centres due to the increase in data use, Munters’ leading equipment cools down these energy-intensive centres.
TW: It seems like, despite the headlines, there are companies innovating and capitalising on these opportunities.
PJ: Absolutely. We love finding companies that are not well known but are best positioned to benefit from these big themes. Despite the market stress and uncertainty, we’re seeing order books explode at a number of companies benefiting from a wave of investment.
TW: Looking at the macro perspective for the next couple of years, are we optimistic or pessimistic?
MC: We don’t have strong views on the macro compared to other investors. We’re in a unique period with higher interest rates, high inflation, and geopolitical tensions causing unease and uncertainty.
We can’t predict the short-term outcome, but the valuations for some very good companies are extremely low. Small caps in Europe are the cheapest they’ve been in 20 years. If you take a long-term view, maybe over five or 10 years, this is probably the best buying opportunity we’ve seen in Europe this century.
TW: So, in the midst of uncertainties, you see a silver lining and potential for significant growth?
MC: Exactly. The present market offers probably the best buying opportunity we've seen in Europe this century, especially with small caps being the cheapest in two decades.
TW: It’s refreshing to hear such optimism and strategic thinking amidst the prevailing challenges. Thank you, Mike and Pras, for sharing your insights on the VT Downing European Unconstrained Income Fund and the broader market landscape.