By Pras Jeyanandhan, Fund Manager, VT Downing European Unconstrained Income Fund
The rapid ascent of AI has sparked a modern-day gold rush, sending stocks like NVIDIA soaring and fuelling excitement across the market. But as enthusiasm begins to cool, the real investment opportunities are emerging not within the high-flying giants, but in the foundational value chains—the “picks and shovels” that power the industry from behind the scenes. Our investment approach focuses on identifying these underlying enablers, those with sustainable advantages and realistic valuations that stand to benefit from AI’s growth over the long term.
This approach allows us to tap into the AI trend through companies that are indispensable to its infrastructure, yet insulated from speculative hype. Here’s how we’re approaching AI’s value chain, with examples from holdings in our fund.
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Energy and infrastructure: Powering AI’s backbone
AI’s demand for data processing and computational power is immense, creating a critical need for robust energy and infrastructure. This is where companies that provide essential energy solutions and data centre support come into play, delivering the backbone of the AI industry.
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Siemens Energy is a key player in power generation and transmission. As the energy demands of AI continue to climb, companies like Siemens Energy support data centres with reliable, scalable power solutions.
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Orsted offers renewable energy solutions, which are increasingly vital for powering AI infrastructures sustainably. With data centres consuming more power than ever, Orsted’s renewable offerings address AI’s environmental impact and support a growing demand for clean energy.
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Friedrich Vorwerk specialises in energy infrastructure, helping to develop and manage the networks necessary to support the energy-intensive needs of AI data centres.
These companies provide the energy foundation that keeps AI systems operational and sustainable, meeting the infrastructure needs essential to AI’s growth without the inflated valuations of headline tech stocks which we like and are supporting.
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Climate control and cooling: The unsung heroes of data centres
Running AI applications at scale generates considerable heat, making effective cooling solutions vital to maintaining performance and longevity. As data centres expand, demand is growing for companies specialising in climate control solutions to help optimise these facilities.
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Munters is a leader in climate control, offering data centre cooling solutions that are essential for sustaining AI’s processing environments. Efficient cooling is crucial for operational continuity, and Munters’ innovations help ensure that data centres operate at optimal conditions with minimal energy waste.
By focusing on companies that address this critical operational need, we gain exposure to an indispensable component of AI infrastructure.
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Semiconductors and advanced materials: The core of AI processing
While graphics processing units (GPUs) are at the forefront of AI hardware, the materials and specialised components that power them are equally vital. Semiconductor and materials companies are at the heart of this supply chain, ensuring AI applications have the computing power they need to function.
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Soitec develops advanced semiconductor materials essential for producing AI chips. By focusing on materials innovation, Soitec is helping pave the way for next-generation processors that will power AI applications across sectors.
Investing in companies like Soitec provides exposure to the essential components behind AI’s processing capabilities, offering a less volatile way to participate in the sector’s growth.
The value chain advantage: Balanced exposure with enduring growth
From a European equity investors perspective, we believe the real opportunity in AI lies in the overlooked yet essential players within its value chain. By investing in companies like Siemens Energy, Orsted, Friedrich Vorwerk, Munters, and Soitec, we capture the broader AI trend through the providers that enable it. This “picks and shovels” strategy allows us to benefit from AI’s growth without the volatility of high-profile tech names.
By focusing on foundational players that provide energy, infrastructure, data management, and essential components, we have built what we believe is a balanced portfolio positioned for enduring growth as the AI industry matures.
A long-term perspective on AI’s evolution
AI’s transformative potential is undeniable, but long-term success depends on a stable foundation. As the market cools from its initial fervour, we remain focused on value-driven, essential players that are indispensable to AI’s infrastructure. By investing in these foundational companies, we’re able to capture AI’s growth, navigating the sector’s inevitable cycles with confidence and discipline.
For those looking to invest in AI with a measured approach, our strategy offers a carefully considered path forward, staying grounded in companies that support the broader AI ecosystem while avoiding speculative excess. The future of AI is bright, but as history shows, the true winners are often those who supply the tools to make it all happen.
Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.
Important notice: this document has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). Capital is at risk and investors should note that their investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a reliable indicator of future performance. Any subscription to the fund should be made on the basis of the relevant product literature available from Downing or from the ACD, Valu-Trac; and your attention is drawn to the charges and risk factors contained therein. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street London EC3R 6AF.
