Stephen Diggle’s Firm Joins Race to Load Up on European Defense Stocks

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A hedge fund manager famed for a $2.7 billion volatility trading gain during the global financial crisis is now looking at investment themes stemming from the Russian invasion of Ukraine.

Stephen Diggle bought defense stocks including BAE Systems Plc in anticipation of western Europe rearming itself. Countries will also move to reduce their dependence on Russia for energy and rare metals, he added.

“They all seem like being major, multi-year trends,” Diggle, who now runs a family office in Singapore, said in a recent interview. “The risk-reward has shifted a lot in the past seven days.”

The Russian invasion has sent shock waves across markets, aggravating inflation concerns and threatening the global economic recovery from the pandemic. European defense stocks have jumped, while prices of grains, metals and oil have soared.

At the outset of the war, Diggle’s $300 million family office Vulpes Investment Management Pte. bought shares of Thales SA, the French aerospace, defense and security company, as well as BAE, Europe’s biggest defense firm. It added to the bets on Feb. 28 after German Chancellor Olaf Scholz pledged to ramp up military spending, and is looking to make private investments in this area, Diggle said.

Efforts by Germany and other European countries to cut dependence on Russia will benefit green energy companies and those that focus on improving fuel efficiency, because prices will stay elevated for some time, Diggle said. Vulpes is looking into creating a company in Germany to finance property owners who want to make their buildings more energy efficient, similar to a Singapore venture it started, he added.

He also sees countries turning to Africa as an alternative to Russian supplies of niche metals, including palladium, titanium and nickel — which jumped to a record this week in unprecedented trading.

Diggle co-founded Artradis Fund Management Pte. in 2001. The hedge fund firm shot to fame for its lucrative bets in 2007 and 2008 that market volatility would spike and credit would falter, pitting it against global investment banks. The strategy was later hurt by easy monetary policies, and the firm shut in early 2011 after assets shrank.

Lesser known was Diggle’s foray into Russia, which he described as “easily the worst investing experience.” Assets of the Vulpes Russian Opportunities Fund peaked at $220 million, said Philipp von Bernstorff, who led it with Diggle’s Russian-speaking brother Martin Diggle. In 2008, it bet on a recovery in Russian markets after the country’s stocks sank, Diggle wrote in a final letter to the fund’s investors in February 2021.

‘Worst Losses’

Initially rewarded in 2009, Vulpes spent the next decade or so fighting to recoup “the worst losses” in its history following misappropriation of assets by local parties, Diggle wrote. Among its investments, the fund had a large holding in Ukrainian locomotive-maker Luganskteplovoz, only to see it cease operations after Russia’s 2014 annexation of Crimea, he wrote.

While most long-term outside investors got out intact as the fund wound down most liquid holdings over the years, Vulpes itself lost about $25 million, nearly half of its investment in the fund, said von Bernstorff. Diggle’s family eventually bought out other investors and wrote off its remaining assets.

Burned by that experience, Diggle is steering clear while Wall Street firms buy up beaten-down Russian corporate bonds. Some bargain traditional energy assets elsewhere may benefit from the shift away from Russian fuel supplies, he said, adding that Vulpes is an investor in the owner of two large Polish coalfields. He sits on the board of Pelagic Resources Pte., a Singapore-based startup that extracts and brokers African rare metals.

“Russia has been expelled from the mainstream of Western commerce,” he said. “That’s what’s going to create opportunities.”